Vera Bradley
Annual Report 2018

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549_____________________________________________ FORM 10-K_____________________________________________ xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Fiscal Year Ended February 3, 2018OR¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Transition Period From to Commission File Number: 001-34918_____________________________________________ VERA BRADLEY, INC.(Exact name of registrant as specified in its charter) _____________________________________________ Indiana 27-2935063(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification No.) 12420 Stonebridge Road,Roanoke, Indiana 46783(Address of principal executive offices) (Zip Code)(877) 708-8372(Registrant’s telephone number, including area code)_____________________________________________ Securities registered pursuant to Section 12(b) of the Act:Title of each class Name of each exchange on which registeredCommon Stock The NASDAQ Global Select MarketSecurities registered pursuant to Section 12(g) of the Act:None _____________________________________________ Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No xIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No xIndicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x No ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorterperiod that the registrant was required to submit and post such files). Yes x No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, andwill not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, oremerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company”in Rule 12b-2 of the Exchange Act.Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨ Emerging growth company ¨ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new orrevised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. oIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No xThe aggregate market value of the registrant’s voting common stock held by non-affiliates of the registrant as of July 29, 2017 was $206,807,728.The registrant had 35,519,809 shares of its common stock outstanding as of March 27, 2018._____________________________________________ DOCUMENT INCORPORATED BY REFERENCE:Portions of the registrant’s definitive proxy statement for the 2018 Annual Meeting of Shareholders are incorporated by reference into Part III of thisAnnual Report on Form 10-K. Forward-Looking StatementsThis annual report contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical or currentfact included in this report are forward-looking statements. Forward-looking statements include references to our current expectations and projectionsrelating to our financial condition, results of operations, plans, objectives, strategies, future performance, and business. You can identify forward-lookingstatements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,”“expect,” “project,” “plan,” “intend,” “believe,” “may,” “might,” “will,” “should,” “can have,” and “likely” and other words and terms of similar meaning inconnection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we makerelating to our estimated and projected earnings, revenues, costs, expenditures, cash flows, growth rates, and financial results, our plans and objectives forfuture operations, growth, initiatives, or strategies, or the expected outcome or impact of pending or threatened litigation are forward-looking statements. Allforward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:•possible inability to successfully implement our long-term strategic plan, including our Vision 20/20 initiatives;•possible continued declines in our comparable sales;•possible inability to maintain and enhance our brand;•possible failure of our multi-channel distribution model;•possible adverse changes in general economic conditions and their impact on consumer confidence and consumer spending;•possible inability to predict and respond in a timely manner to changes in consumer demand;•possible inability to successfully open new stores and/or operate current stores as planned;•possible loss of key management or design associates or inability to attract and retain the talent required for our business;•possible ramifications from the payment card incident disclosed in October 2016; and•possible data security or privacy breaches or disruptions in our computer systems or website.We derive many of our forward-looking statements from our operating plans and forecasts, which are based upon detailed assumptions. While we believe thatour assumptions are reasonable, we caution that it is difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors thatcould affect our actual results.For a discussion of the above described risks and other risks and uncertainties that could cause actual results to differ materially from those contained in ourforward-looking statements, please refer to “Risk Factors” in Item 1A of this report.We caution you that the risks and uncertainties identified by us may not be all of the factors that are important to you. Furthermore, the forward-lookingstatements included in this report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statementas a result of new information, future events, or otherwise, except as required by law.2TABLE OF CONTENTS PART I.4 Item 1.Business4 Item 1A.Risk Factors15 Item 1B.Unresolved Staff Comments26 Item 2.Properties26 Item 3.Legal Proceedings27 Item 4.Mine Safety Disclosure27 PART II.28 Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities28 Item 6.Selected Financial Data31 Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations34 Item 7A.Quantitative and Qualitative Disclosures About Market Risk50 Item 8.Financial Statements and Supplementary Data51 Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure79 Item 9A.Controls and Procedures79 Item 9B.Other Information79 PART III.80 Item 10.Directors, Executive Officers and Corporate Governance80 Item 11.Executive Compensation80 Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters80 Item 13.Certain Relationships and Related Transactions, and Director Independence81 Item 14.Principal Accounting Fees and Services81 PART IV.82 Item 15.Exhibits, Financial Statement Schedules82 Item 16.Form 10-K Summary823Table of ContentsPART I In this Form 10-K, references to “Vera Bradley,” “we,” “our,” “us” and the “Company” refer to Vera Bradley, Inc. and its subsidiaries, including Vera Bradley Designs, Inc.The Company utilizes a 52-53 week fiscal year ending on the Saturday closest to January 31. The fiscal year ended February 3, 2018 (“fiscal 2018”) was a 53-week period. Thefiscal years ended January 28, 2017 (“fiscal 2017”) and January 30, 2016 (“fiscal 2016”) were each 52-week periods. The fiscal year ending February 2, 2019 (“fiscal 2019”)will be a 52-week period.Item 1. BusinessOur CompanyVera Bradley is a leading designer of women’s handbags, luggage and travel items, fashion and home accessories, and unique gifts. Founded in 1982 byfriends Barbara Bradley Baekgaard and Patricia R. Miller, the brand’s innovative designs, iconic patterns, and brilliant colors inspire and connect womenacross the country.Vera Bradley offers a multi-channel sales model, as well as a focus on service and a high level of customer engagement. The Company sells its productsthrough two reportable segments: Direct and Indirect. The Direct business consists of sales of Vera Bradley products through the Company’s full-line andfactory outlet stores in the United States, verabradley.com, the Company’s online outlet site, direct-to-consumer eBay sales, and the Company’s annual outletsale in Fort Wayne, Indiana. As of February 3, 2018, the Company operated 109 full-line stores and 51 factory outlet stores. The Indirect business consists ofsales of Vera Bradley products to approximately 2,400 specialty retail locations, substantially all of which are located in the United States, as well asdepartment stores, national accounts, third party e-commerce sites, third-party inventory liquidators, and sales generated through licensing agreements. Forfinancial information about our reportable segments, refer to Note 15 of the Notes to Consolidated Financial Statements set forth in Part II, “Item 8. FinancialStatements and Supplementary Data,” of this report.Our HistoryBarbara Bradley Baekgaard and Patricia Miller founded the Company in 1982 in Fort Wayne, Indiana, after recognizing a lack of stylish travel accessories inthe market. Within weeks, the friends created Vera Bradley, named after Ms. Bradley Baekgaard’s mother, and began manufacturing and marketing theirdistinctive products. The founders, together with past and present members of the executive management team, have been instrumental in our growth andsuccess. The following timeline sets forth a summary of significant milestones in Vera Bradley’s history by calendar year:1982–Barbara Bradley Baekgaard and Patricia Miller launched Vera Bradley by introducing three products: the handbag, the sports bag, andthe duffel bag. 1987–Ernst & Young honored our Co-Founders with an “Entrepreneur of the Year” award. 1991–To accommodate the increasing number of attendees, we relocated our annual outlet sale from a tent in our parking lot to its presentlocation at the Allen County War Memorial Coliseum Exposition Center in Fort Wayne, Indiana. 1998–We founded our primary philanthropy, the Vera Bradley Foundation for Breast Cancer. 1999–Our products were sold in all 50 states through Indirect retailers. 2005–We launched the Vera Bradley Visual Merchandising Program, providing our retail partners a framework for presenting the brand andmerchandising our products in a consistent manner. 2006–We launched our e-commerce business through our website, verabradley.com. 2007–We opened a state-of-the-art distribution facility in Roanoke, Indiana and also opened our first full-line store at the Natick Collection,in greater Boston.4Table of Contents2009–We opened our first outlet store at Chicago Premium Outlets in Aurora, Illinois. 2010–We completed our initial public offering. 2011–We opened the Vera Bradley Design Center in Roanoke, Indiana, and launched our products in Dillard's department stores. 2012–We completed a 200,000 square-foot expansion of our distribution facility in Roanoke, Indiana; increased our presence to all Dillard’slocations; and launched a relationship with Von Maur department stores. 2013–We migrated verabradley.com to a more responsive design, providing an enhanced shopping experience and improved product viewingregardless of the device being used to shop. 2014–We introduced leather and full coordinating collections; began our relationship with Macy's; and launched our first national adcampaign. 2015–We launched several new collections including Collegiate; launched our “I AM” national ad campaign; increased our presence inMacy's; and introduced our products in Belk and Bon-Ton department stores. 2016–We opened our first flagship store in New York, New York in the SoHo neighborhood; introduced our Gallatin relaxed leathercollection; launched our “It's Good to Be a Girl” national marketing campaign; and expanded our collegiate collection to over 70schools. 2017–We launched our new digital flagship; created an online outlet site; and introduced our Iconic cotton collection.The passion for design and customer service established by our founders has driven our Company for over 30 years and remains the cornerstone of VeraBradley today. Ms. Baekgaard continues to focus on various Vera Bradley-related projects. Ms. Miller retired in October 2012 as our National Spokesperson,but continues to serve on the Board of Directors along with Ms. Baekgaard.Vision 20/20 InitiativesDuring fiscal 2018, we launched “Vision 20/20” which is an aggressive plan to turnaround our business and restore brand and Company health over the nextthree years. Integrating our Vision 20/20 initiatives into our long-term strategic plan is expected to lay the foundation for growth, a more profitable future,and continued strong cash flows.The key focus of Vision 20/20 is moving to a significantly less clearance-driven business model combined with a meaningful reduction in SG&A expenses.To move to a significantly less clearance driven business model, we are focusing on three key product and pricing initiatives: reducing the amount ofclearance merchandise offered, narrowing our current product offerings, and introducing tighter assortment guardrails.We will significantly reduce the amount of clearance merchandise offered on verabradley.com and in our full-line stores. This will help to reset ourcustomers’ pricing expectations and restore our full-price business. To reduce certain clearance sales from verabradley.com, we began the use of our onlineoutlet site in the third quarter of fiscal 2018 by conducting two flash sales.We are focusing on our best categories and will narrow our current product offerings by eliminating unproductive or incongruent categories and SKUs fromour assortments. We began to narrow our product offerings in fiscal 2018 and are discontinuing our fragrance and jewelry collections in spring of fiscal 2019.We are building tighter assortment guardrails around introducing new categories, patterns, and pricing, assuring the right fit for our brand and that ourproducts not only provide thoughtful solutions but also reflect our signature attributes of being comfortable, casual, and affordable. These initiatives shouldbe reflected in our product by fall of fiscal 2019.We expect these product and pricing initiatives to negatively affect revenues in fiscal 2019, but we believe these are the right actions to take for the futurehealth of the business.5Table of ContentsAs we reduce revenues, we will also continue to reduce SG&A expenses. These SG&A expense reductions began in fiscal 2018 by right-sizing our corporateand retail store infrastructure to align with the size of our business. Additional initiatives to reduce SG&A expenses include continuing to identify corporateefficiencies, reducing our marketing expenses and optimizing return on marketing spending, and taking a more aggressive stance on reducing store operatingexpenses and closing underperforming stores. We are forecasting to close up to 45 additional full-line stores (approximately 15 per year) by the end of fiscal2021, primarily as leases expire. We closed five underperforming full-line stores and one underperforming factory outlet store during fiscal 2018.Growth StrategiesOur long-term vision is to build on the Company's rich heritage and establish Vera Bradley as a premium global lifestyle brand, expand our customer reach,and grow our customer connections. Our long-term strategic plan, integrated with Vision 20/20, is centered upon the three planks of product, distribution,and marketing.We call our target aspirational customer the Day Maker. She is organized, thoughtful and, most of all, appreciates femininity and beauty - in color, print, andthoughtful details. We are focused on creating thoughtful solutions for the Day Maker and believe we have a great opportunity to attract more Day Makers toour brand through our product offerings, our distribution channels, and our marketing efforts.Product. We have identified four key businesses where we can offer the Day Maker thoughtful solutions that we believe will propel our future growth. Weare optimizing our existing core portfolio by eliminating product categories and specific SKUs that are unproductive or incongruent, as well as expandinginto relevant new categories that reflect our brand and signature attributes of comfortable, casual, and affordable. We will continue to use licenses andstrategic partnerships as appropriate to expand our product categories.•Our Fashion Bag and Accessories business continues to be our largest opportunity and allows us to highlight our innovation, function, and fashion.Both patterns and solids are important in this category.•Travel remains a core differentiator for Vera Bradley and allows us to both embrace our heritage and to showcase newness and functionality withproducts like Lighten Up and our unique collapsible luggage.•Our Campus business including backpacks, has been successful, and we believe there are further opportunities to expand our Campus authoritygoing forward.•We believe Home can continue to be a significant growth opportunity for Vera Bradley, with market attractiveness and a great brand fit. The DayMaker’s fashion statement is often her home. Licensing will continue to play a key role in the home area.In each of these areas, fabric, pattern innovation, and newness remain critical in staying relevant.Distribution Channels. Vera Bradley products are available through our Direct channel including full-line and factory outlet stores, online throughverabradley.com and our online outlet site, and our annual outlet sale, as well as through the Indirect channel including department and specialty retailstores, national accounts, third-party e-commerce sites, and third-party inventory liquidators. We continue to focus on tightly integrating our multi-channelbusiness by strengthening and right-sizing both our Direct and Indirect distribution channels.In 2007 and 2009, we opened our first full-line and factory outlet stores, respectively. We believe there continues to be long-term opportunities for new storesthroughout the United States. We opened one new full-line pop-up store and six new factory outlet stores in fiscal 2018; however, we have slowed our short-term plans for new factory outlet store openings and suspended full-line store growth until we begin to produce comparable store sales growth.We closed five underperforming full-line stores in fiscal 2018 and expect to close up to 45 additional underperforming full-line stores by fiscal 2021,primarily as leases expire. During fiscal 2017 and 2018, we completed 34 full-line store renovations and updated the facade and exterior signage in anadditional 14 full-line stores. These renovations were made to our continuing locations. Nearly 40 of our full-line stores reflect our new design aesthetic.We plan to open six new factory outlet stores in fiscal 2019. At February 3, 2018, nearly 80% of the product in the outlet channel was made specifically forour factory outlet stores. This percentage is expected to increase in fiscal 2019.In 2006, we began selling directly to consumers through verabradley.com. Building our digital flagship remains a key part of our distribution strategy. Theredesign and conversion of our website to a new platform was completed in February 2017. This new platform offers enhanced ease of shopping andincremental functionality. This incremental functionality includes an upgraded mobile experience; additional navigation and search enhancements;improved product pages with enhanced imagery, product videos, and user-generated content; and new capabilities like eGift cards, “order on-line, pick up instore” and the6Table of ContentsGiftNow feature. The GiftNow feature allows customers to purchase gifts from verabradley.com that can be modified by the recipient before shipment. Thenew platform also gives us capabilities to create deeper customer relationships and create value through more personalization and strategic customization. Aspart of the Company's Vision 20/20 initiatives, we created an online outlet site during the third quarter of fiscal 2018 to allow us to reduce clearance salesfrom verabradley.com. In fiscal 2018, we had over 46 million visits to our website and our online outlet site.Our department store relationships allow us to expose our brand to new customers and showcase our new product assortments. We are currently inapproximately 660 department store locations, including Dillard’s, Macy's, Bon-Ton, Belk, and Von Maur. In the department stores, we are continuing towork on enhancing our brand presentation and to explore expansion of our lifestyle brand offerings.The specialty retail channel is the heritage of our business and remains important to us. We continue to add select accounts while discontinuingunproductive accounts. While the specialty retail business is becoming a smaller percentage of our total revenue base, we are working to stabilize it byassisting retailers with optimizing their businesses.We had a small wholesale presence in Japan during fiscal 2018 with a licensed partner but will be exiting Japan in mid fiscal 2019. We are exploring thepossibility of expanding into other countries in the long-term but do not foresee any international country expansion in fiscal 2019.Marketing. Marketing and brand positioning are both critical elements as we continue to engage new consumers and strengthen our bond with existingcustomers.We activated our new branding and brand positioning in fiscal 2017, which included updating elements of our visual identity such as our logo and furtherevolving our marketing to speak more directly to the Day Maker. We increased our brand awareness in fiscal 2018 through our “digital first” strategy bypartnering with key influencers and leveraging social media channels.Well-timed and well-executed brand activation is critical to increasing our brand relevancy and increasing purchase intent. Through comprehensiveconsumer research, we have designed a media plan that we believe effectively targets our Day Maker customers and attracts both lapsed and new Day Makerconsumers to our brand. Our media efforts include a fully-integrated mix of digital, social, experiential, and print, with our goal being to surround the DayMaker with our brand.We reduced our marketing expenditures in fiscal 2018 by focusing on efficiencies and becoming more targeted while working to keep our most loyalcustomers engaged, as well as working to attract new consumers.Competitive StrengthsWe believe the following competitive strengths differentiate us within the marketplace:Strong Brand Identity and Positioning. We believe the Vera Bradley brand is highly recognized for its distinctive and vibrant style. Vera Bradley ispositioned in the market as a lifestyle brand that inspires consumers to express their femininity, individuality, and sense of style. We have also positioned ourbrand 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 increases our ability to achieve repeat purchases.Customer Loyalty. We believe we have a segment of long-term consumers who act as loyal and enthusiastic brand advocates. We believe this enthusiasm forour brand by our loyal customers inspires repeat purchases. Our customers often purchase our products as gifts for family members and friends, who we striveto turn into brand enthusiasts.Product Development Expertise. Our product development team combines an understanding of consumer preferences with a knowledge of color, fashion, andstyle trends to design our products. Our creative design associates utilize a disciplined product design process that seeks to maximize the productivity of ourproduct releases, including our print designs, 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, highlyshop-able, fun, and characteristic of our brand. Whether they visit a Vera Bradley store, specialty retail store, department store, or verabradley.com, we believeconsumers can find the brand in places that match their unique shopping interests. Our multi-channel distribution model enables us to maximize customeraccess to our products.7Table of ContentsUnique Company Culture. We were founded in 1982 by two friends, Barbara Bradley Baekgaard and Patricia Miller, who built our business around theirpassion for design and commitment to customer service. We believe our founders created a unique culture that attracts passionate and motivated employeeswho are excited about our products and our brand. Our employees share our founders’ commitment to Vera Bradley customers and to the Company’s corevalues of Kindness, Ingenuity, Thoughtfulness, Optimism, Tenacity, and Empathy. We believe that a fun, friendly, and welcoming work environment fosterscreativity and collaboration. By empowering our employees to become personally involved in product design, testing, and marketing, they becomepassionate and devoted brand advocates.Experienced Management Team. Our senior management team, led by our Chief Executive Officer Robert Wallstrom, has extensive experience across adiverse range of disciplines in product design, merchandising, marketing, store operations and development, supply chain management, and finance.Our Product Release StrategyWe introduce new collections approximately ten times per year. Each launch typically consists of one to three signature cotton-quilted prints, as well as otherfabrications including microfiber, leather, Lighten Up, and Midtown, many of which are also available in solid colors. These collections of prints and solidsare incorporated into the designs of a wide range of products, including bags, accessories, and travel items. These collections typically include classic styles,updates to existing designs, and new product introductions.To keep our assortment current and fresh, and to focus our inventory investments on our best performers, we discontinue prints and fabrications as necessary.We sell our remaining inventory of retired products primarily through our website (including our online outlet site), factory outlet stores, annual outlet sale,and third-party liquidators.Our ProductsThe following chart presents net revenues generated by each of our four product categories and other revenues as a percentage of our total net revenues forfiscal 2018, 2017, and 2016. Fiscal Year Ended February 3, 2018 January 28, 2017 January 30, 2016Bags 40.6% 42.8% 42.9%Travel 26.1% 24.5% 24.9%Accessories 22.0% 21.9% 22.3%Home 6.8% 5.7% 4.5%Other (1) 4.5% 5.1% 5.4%Total 100.0% 100.0% 100.0%(1)Includes primarily apparel/footwear, stationery, freight, licensing, merchandising, and gift card breakage revenue.Bags. Bags are a core part of our product offerings and are the primary component of every seasonal assortment. The category consists of classic and newstyles developed by our product development team. Our bag product category includes items such as totes, crossbodies, satchels, clutches, backpacks, babybags, and lunch bags. Bags play a prominent role in our visual merchandising, and we showcase the different fabrications, patterns, colors, and features ofeach bag.Travel. Our travel product category includes rolling luggage, cosmetics, travel and packing accessories, and travel bags which includes our iconic duffel andweekend bags. The first Vera Bradley product offering included duffel bags, which have consistently have been strong performers. We believe theirpopularity, as well as the appeal of our other travel items, results from our vibrant designs, functional styles, and lightweight fabrications.Accessories. Accessories include fashion accessories such as wallets, wristlets, eyeglass cases, scarves, and various technology accessories. Our accessories areattractively priced and allow the consumer to include some color in her wardrobe, even if tucked into another bag. Our product development teamconsistently updates the accessories assortment based on consumer demand and fashion trends.Home. Our home category includes textiles, including throw blankets, beach towels, and comforters, as well as items such as mugs and tumblers.8Table of ContentsProduct DevelopmentWe have implemented a fully integrated and cross-functional product development process that aligns design, trend and market research, merchandising,planning, sales, marketing, and sourcing. Product development is a core capability that makes our products unique. Our designs and aesthetics set ourproducts apart and drive customer loyalty. Our design and product development teams combine an understanding of the needs of our target Day Makercustomers, with knowledge of upcoming color and fashion trends, to design new collections, as well as new product categories, that will resonate in themarket.We typically begin the development stage of our products in the Vera Bradley portfolio twelve to eighteen months in advance of their release. Thedevelopment of each new pattern includes the design of a primary, secondary, and sometimes a tertiary print. To seek fresh perspectives, we often collaboratewith independent designers to create unique patterns for each season and also maintain an internal print design team. We oversee the development andexercise the final approval of all patterns and designs. Once developed, we generally copyright our patterns as appropriate. We believe that great design isnot only central to our product, but also is a fundamental part of our brand development and growth strategies.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 andDay Maker customer needs and regularly updates classic styles to enhance functionality. In addition, we actively pursue opportunities to expand our productofferings through new line and brand extensions. Our product development team monitors fashion trends and customer needs by attending major trend showsin Europe and the United States, subscribing to trend monitoring services, and engaging in comparison-shopping.Our product development team works closely with our marketing team to gather consumer insights through seasonal market research and in-store testing. Wegather seasonal market research through a variety of methodologies, including scheduled interviews and online and in-person surveys conducted by our in-house team. The design and product development teams ensure that we offer products that are constructed to meet our standards of design, function, andquality in a cost-effective manner. We believe that with our cross-functional, collaborative approach, we are able to introduce and sell our merchandise in away that clearly communicates the Vera Bradley brand.In addition to products developed in-house, we also pursue brand extensions through strategic partnerships and licensing agreements. We currently havelicenses in place for eyewear, collegiate, bedding, hosiery, swimwear, technology accessories, stationery, publishing, and health care uniform and accessoriescollections. We will continue to look for the right strategic partners and licensees that can augment the brand and provide established distribution networksfor certain categories of business.MarketingWe 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 theVera Bradley brand personality. We use marketing as a critical tool in our efforts to promote our brand.Retention Advertising. Vera Bradley communicates with our established customers consistently throughout the year with regular e-mails, social media, andseasonal direct mail catalogs, brochures, and notifications. Our retention advertising is geared to keeping Vera Bradley top of mind with our customers,rewarding our customers, and providing them with news of our seasonal launches and new product introductions.New Customer Acquisition Advertising. We primarily employ digital (i.e., display banner, mobile, geo-targeting, and pre-roll video) and print advertising toincrease overall brand awareness and attract new customers. Our advertisements are placed in fashion, lifestyle, and family publications and websites thatcomplement the wide breadth of appeal of our brand. Our ads have recently appeared in StyleWatch, InStyle, Glamour, Cosmopolitan, Vogue, Elle, and O theOprah Magazine.Public Relations and Product Placement. Vera Bradley has received considerable editorial exposure in the press, with mentions in O the Oprah Magazine,Good Housekeeping, Real Simple, Woman's Day, InStyle, Racked, and The Huffington Post. In addition, we have expanded our public relations efforts toreach popular online influencers and bloggers.Product placement in feature-length films and on prime-time television shows remains strong with television placements in Life in Pieces, The Big BangTheory, Blackish, Speechless, and American Housewife. Movie placements include: Pitch Perfect 3, La La Land, Girl's Trip, Baywatch, A Bad MomsChristmas, and Den of Thieves.Partnerships. We work with high-profile partners to enhance our brand image and expand our customer reach. During fiscal 2017, we partnered with MadisonSquare Garden which, among other things, featured our new logo and video content. In fiscal 2018, we participated in a new six-episode reality competitiontelevision show called Girl Starter which aired on TLC9Table of Contentsbeginning in early April. The show integrated our product and “It’s Good to be a Girl” marketing campaign clips. One episode featured a challenge in whichour co-founder, Barbara Bradley Baekgaard, was a guest judge.Social Media and Online Marketing. We use online marketing and social networking sites as tools to increase brand awareness and drive traffic toverabradley.com and to our stores. We have captured approximately 4.6 million active customer e-mail addresses in our online customer file, with many ofthese customers providing age, occupation, and location data. This information provides us with deeper insight into the products and categories that are ofthe highest interest to our customers, and allows us to better target our customers with appropriate messages. As of February 3, 2018, we had approximately1.8 million Facebook fans and approximately 84,000 Twitter followers. Our Instagram, which we launched in October 2012, has grown to approximately330,000 followers and is our most highly engaged social medium. In addition, we often partner with brand-right bloggers to promote product.Direct Mail. Seasonal Vera Bradley catalogs are a vehicle for promoting our brand and product portfolio. Each catalog is sent to a targeted customer mailinglist. In addition to distributing the catalog, we produce and distribute a number of other marketing pieces, including postcards and mini-mailers. We believeour direct mail medium generates excitement and awareness about the brand and seasonal introductions and allows us to reach both new and loyal customersin their homes.SeasonalityBecause Vera Bradley products are frequently given as gifts, we have historically realized, and expect to continue to realize, higher sales and operatingincome in the fourth quarter of our fiscal year, which includes the holiday months of November and December. In addition, fluctuations in sales andoperating income in any fiscal quarter are affected by the timing of seasonal wholesale shipments and other events affecting retail sales.Channels of DistributionWe distribute our products through our Direct and Indirect segments. This multi-channel distribution model is designed to enable operational flexibility andmaximizes the methods by which we can access potential customers.Direct SegmentFull-Line Stores. We have developed a retail presence through our full-line stores, all located in the United States, which provides us with a format toshowcase our brand and the full array of Vera Bradley products. As of February 3, 2018, we operated 109 full-line stores averaging approximately 1,900square feet per store. In fiscal 2017, we opened our first flagship store in the SoHo neighborhood of New York City which offers customers a unique storeexperience, as well as exclusive product. Our sales associates are passionate about our products and customer service, which, we believe, translates into asuperior shopping experience.Factory Outlet Stores. Our factory outlet stores are a vehicle for selling factory exclusive styles, as well as retired merchandise at discounted prices, whilemaintaining brand integrity. At the end of fiscal 2018, nearly 80% of the merchandise found in our factory outlet stores was factory exclusive styles. Webelieve our factory outlet stores are an integral part of our distribution strategy, as this format provides an additional channel of distribution for our productsand enables us to better target value-oriented customers. Our factory outlet stores average approximately 3,200 square feet per store. As of February 3, 2018,we operated 51 factory outlet stores, all located in the United States.Store Location Selection Strategy. Our store location decisions for both full-line and factory outlet stores are made based upon our comprehensive retailstrategy that includes actual and planned penetration in both Indirect and Direct segments, as well as existing e-commerce demand. At this time, we do notbelieve all geographical markets have been fully penetrated by our distribution channels. We believe that long-term expansion of our store base will increasebrand awareness and reinforce our brand image. In addition to analyzing store economics, we pay particular attention to the location within the shoppingcenter, 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 abalanced mix of moderate and high-end retailers to encourage high levels of traffic. Our target full-line store size is approximately 1,800 square feet and ourtarget factory outlet store size is approximately 3,000 square feet.Store Operations. The focus of our store operations is providing consumers with a comfortable and memorable shopping experience. We strive to make theexperience interactive through special store events, such as showcasing newly launched products or celebrating our namesake’s birthday. Our customerservice philosophy emphasizes friendly service, merchandise knowledge, and passion for the brand. Consequently, an essential requirement for the success ofour stores is our ability to attract, train, and retain talented, highly motivated district managers, store managers, and sales associates.10Table of ContentsStore Economics. We expect our full-line stores to average approximately 1,800 square feet per store, and we expect to invest approximately $0.4 million pernew store, consisting of inventory, pre-opening costs, and build-out costs, less tenant-improvement allowances.We expect our factory outlet stores to average approximately 3,000 square feet per store, and we expect to invest approximately $0.4 million per new store,consisting of inventory, pre-opening costs, and build-out costs, less tenant-improvement allowances.E-Commerce. In 2006, we began selling our products through the verabradley.com website. The objective of verabradley.com is to provide both a mechanismfor marketing directly to consumers and a storefront where consumers can find the entire full-line Vera Bradley collection. Since fiscal 2013, we havecontinually invested in upgrades to our website allowing for a more user-friendly homepage; enabling us to ship internationally; enhancing the checkoutexperience; adding product recommendations; enhancing product descriptions; adding silhouettes for product scale; generating cart and site abandonmentemails; gathering and analyzing customer feedback; and enhancing our search capabilities. To continue to enhance our website engagement, we completed aredesign and conversion of our website to a new platform in February 2017. This new platform offers enhanced ease of shopping and incrementalfunctionality including an upgraded mobile experience; additional navigation and search enhancements; improved product pages with enhanced imagery,product videos, and user-generated content; and new capabilities like the GiftNow feature, eGift cards, and “order on-line, pick up in store.” In addition,during the third quarter of fiscal 2018, we created an online outlet site to reduce clearance sales from verabradley.com. We had over 46 million visits toverabradley.com and our online outlet site during fiscal 2018.Annual Outlet Sale. Our annual outlet sale is held in the Allen County War Memorial Coliseum Exposition Center in Fort Wayne, Indiana each spring. Theannual outlet sale is an important tradition for Vera Bradley, has many loyal followers, and is an opportunity for us to sell our retired merchandise atdiscounted prices in a brand-right fashion. We attracted approximately 46,000 attendees to our 2017 annual outlet sale.Indirect SegmentAs of February 3, 2018, we sold our products in approximately 2,400 specialty retail locations, as well as department stores, national accounts, third party e-commerce sites, third-party inventory liquidators, and through licensing agreements. In fiscal 2012, we launched our products in the department storechannel. We are currently in approximately 660 department store locations, including approximately 260 Dillard's locations, approximately 240 Macy's,nearly 80 Bon-Ton, 45 Belk, and approximately 35 Von Maur locations.The top 30% of our specialty retailers account for approximately 70% of total specialty retailer revenue. No single Indirect retailer represented more than10% of consolidated net revenues in fiscal 2018, with the top ten Indirect retailers representing in the aggregate approximately 40% of total Indirect netrevenues. The majority of our Indirect retailers have been customers for over five years.Indirect Sales ForceWe believe that having a combination of an in-house field sales force and a third-party agency, covering certain geographies, results in a more consistentbrand presentation and messaging, enhanced support for our Indirect customers, and a more predictable, scalable, and cost-efficient business model. As ofFebruary 3, 2018, our in-house sales team consisted of approximately 25 full-time sales consultants. The compensation structure for our sales consultantsconsisted of a combination of fixed pay and sales-based incentives during fiscal 2018. Beginning in fiscal 2019, the compensation structure will be basedupon a full commission model.In addition to acquiring new and growing existing accounts, our sales consultants serve as a support center for our Indirect customers by assisting andeducating them in areas such as merchandising and visual presentation, marketing the brand, product selection, and inventory management. Our visualmerchandising program provides our sales consultants with a framework to guide our Indirect customers regarding optimal product placement and displaythat is intended to reinforce the message that our brand is distinct from those of our competitors.Manufacturing and Supply Chain ModelOur multi-country manufacturing and supply chain model is designed to achieve efficient, timely, and accurate order fulfillment while maintainingappropriate levels of inventory.Our manufacturing and sourcing strategy is part of the larger cross-functional product development process. The overall objective for our sourcing team is tobuild and sustain collaborative partnerships throughout our supply chain, with a focus on identifying appropriate countries and partners to manufacture ourproducts. The sourcing team leverages its expertise in negotiation, relationship management, and change management to maintain a strong global supplychain.11Table of ContentsWe strive to maintain the appropriate balance of inventory to enable us to provide a high level of service to our customers, including prompt and accuratedelivery of our products. We have an active and nimble sales and operations planning process that helps us balance the supply and demand issues that weencounter in our business, optimize our inventory levels, and anticipate inventory needs. We have also integrated our planning, forecasting, andsegmentation processes under one function called Merchandise Planning and Allocation.Approximately half of our products are cotton-based. Our other fabrics include primarily nylon, polyester, microfiber, and leather. We source our materialsfrom various suppliers in Asia, with the majority coming from China and South Korea. Our global sourcing team works with select suppliers enabling us tooptimize the mix of cost, lead time, quality, and reliability within our global supply network. All of our suppliers must comply with our quality standards,and we use only a limited number of pre-approved suppliers who have demonstrated a commitment to delivering the highest quality products. In April 2016,we opened an office in Hong Kong to lead the global supply chain in Asia, including the oversight of sourcing and procurement.The majority of our finished goods, not sourced through licenses or strategic partners, are manufactured by a variety of global manufacturers locatedprimarily in China, Vietnam, Myanmar, and Cambodia. We are not dependent upon any single manufacturer for our products. When determining the size oforders placed with our manufacturers, we take into account forward-looking demand, lead times for specific products, current inventory levels, and minimumorder quantity requirements. Overseas production has resulted in substantial cost savings and a reduction of capital investment. With the oversight of ouroffice in Hong Kong and our independent contractors, we believe these financial benefits have been realized without sacrificing the level of quality inherentin our products or service to our customers.Distribution CenterIn 2007, we consolidated our warehousing and shipping functions into one distribution center, located in Roanoke, Indiana. In fiscal 2013 and fiscal 2015,we expanded the facility by 200,000 and 10,000 square-feet, respectively, which resulted in a total distribution center space of approximately 428,500square-feet. This automated, computerized facility allows Vera Bradley employees to receive information directly from the order-collection center andquickly identify the products and quantities necessary for a particular order. The expansion resulted in capacity gains in the areas of inbound receiving,inventory storage, order fulfillment, value-add processing, and shipping. The facility’s technology enables us to more accurately process and pack orders, aswell as track shipments and inventory. We believe that our systems for the processing and shipment of orders from our distribution center have enabled us toimprove our overall customer service through enhanced order accuracy and reduced turnaround time.Our products are shipped primarily via third-party common carriers to our stores, our Indirect retailers, department stores, and directly to our customers whopurchase through our website. We believe we are positioned well to support the order fulfillment requirements of our business, including business generatedthrough our website.Management Information SystemsWe believe that high levels of automation and technology are essential to maintain our competitive position. We maintain computer hardware, applications,and networks to enhance and accelerate the design process, to support the sale and distribution of our products to our customers, and to improve theintegration and efficiency of our operations. Our information systems are designed to provide, among other things, comprehensive order processing,production, accounting, and management information and analytics for the product development, retail, sales, marketing, distribution, finance, and humanresources functions of our business. We constantly evaluate and optimize the efficiency and cost of our on premise and cloud technology platforms to enablethe business to provide an exceptional customer experience and increased shareholder value.CompetitionWe face strong competition in each of the product lines and markets in which we compete. We believe that all of our products are in similar competitivepositions with respect to the number of competitors they face and the level of competition within each product line. Due to the number of different productswe offer, it is not practicable for us to quantify the number of competitors we face. Our products compete with other branded products within their productcategories and with private label products sold by retailers. In our Indirect business, we compete with numerous manufacturers, importers, and distributors ofhandbags, accessories, and other products for the limited space available for the display of such products to the consumer. Moreover, the general availabilityof contract manufacturing allows new entrants access to the markets in which we compete, which may increase the number of competitors and adversely affectour competitive position and our business. In our Direct business, we compete against other independent retailers, department stores, catalog retailers, giftretailers, and Internet businesses that engage in the retail sale of similar products.12Table of ContentsThe market for handbags, in particular, is highly competitive. Our competitors include not only established companies that are expanding their productionand marketing of handbags, but also frequent new entrants to the market. We directly compete with wholesalers and direct sellers of branded handbags andaccessories.In varying degrees, depending on the product category involved, we compete on the basis of design (aesthetic appeal), quality (construction), function, pricepoint, distribution, and brand positioning. We believe that our primary competitive advantages are consumer recognition of our brand, customer loyalty,product development expertise, and our widespread presence through our multi-channel distribution model. Some of our competitors have achievedsignificant recognition for their brand names or have substantially greater financial, distribution, marketing, and other resources than we do. Further, we mayface new competitors and increased competition from existing competitors as we expand into new markets and increase our presence in existing markets.Copyrights and TrademarksThe development of new patterns includes the design of primary and secondary prints. Once developed, we generally copyright our patterns as appropriate.We currently have approximately 900 copyrights.We also own the material trademark rights used in connection with the production, marketing, and distribution of all of our products, both in the UnitedStates and in the other countries in which our products are principally sold. Our trademarks include “Vera Bradley.” We aggressively police our trademarksand copyrights and pursue infringers and counterfeiters both domestically and internationally. Our trademarks will remain in existence for as long as wecontinue to use and renew them in advance of their expiration dates. We have no material patents.EmployeesAs of February 3, 2018, we had approximately 2,730 employees. Of the total, approximately 2,140 were engaged in retail selling positions, approximately290 were engaged in distribution, sourcing and quality functions, approximately 40 were engaged in product design, and approximately 260 were engagedin corporate support and administrative functions. None of our employees are represented by a union. We believe that our relations with our employees aregood, and we have never encountered a significant work stoppage.Government RegulationMany of our imported products are subject to existing or potential duties, tariffs, or quotas that may limit the quantity of products that we may import into theUnited States and other countries or impact the cost of such products. To date, we have not been restricted by quotas in the operation of our business, andcustoms duties have not comprised a material portion of the total cost of a majority of our products. In addition, we are subject to foreign governmentalregulation and trade restrictions, including U.S. retaliation against prohibited foreign practices, with respect to our product sourcing and international salesoperations.We are subject to federal, state, local, and foreign laws and regulations governing environmental matters, including the handling, transportation, and disposalof our products and our non-hazardous and hazardous substances and wastes, as well as emissions and discharges into the environment, including dischargesto air, surface water, and groundwater. Failure to comply with such laws and regulations could result in costs for corrective action, penalties, or the impositionof other liabilities. Compliance with environmental laws and regulations has not had a material effect upon our earnings or financial position. If we violateany laws or regulations, however, it could have a material adverse effect on our business or financial performance.Executive Officers of the CompanyThe following table sets forth certain information concerning each of our executive officers:Name Age Position(s)Robert Wallstrom 52 Chief Executive Officer, President and DirectorJohn Enwright 45 Chief Financial OfficerKevin Korney 48 Chief Merchandising OfficerBeatrice Mac Cabe 39 Chief Creative OfficerStephanie Scheele 41 Chief Marketing OfficerMark C. Dely 42 Chief Administrative & Legal Officer and Corporate SecretaryMary Beth Trypus 52 Chief Sales Officer13Table of ContentsRobert Wallstrom has served as our Chief Executive Officer, President and Director since November 2013. Prior to joining Vera Bradley, Mr. Wallstromserved as President of Saks Fifth Avenue’s OFF 5TH division from 2007 until November 2013. Previously, he was Group Senior Vice President and GeneralManager of Saks’ flagship New York store from 2002 to 2007, where he articulated a vision to return the store to its luxury heritage and dramatically improvemerchandising, service, and the in-store experience.John Enwright joined the Company in May 2014 as our Senior Director of Financial, Planning and Analysis and was soon promoted to Vice President,Financial, Planning and Analysis. Mr. Enwright was named Chief Financial Officer in April 2017. Prior to joining Vera Bradley, Mr. Enwright spent 15 yearswith Tiffany & Co. in various financial roles of increasing responsibility, including his most recent position of Director of Financial, Planning and Analysis.Kevin Korney has served as our Chief Merchandising Officer since January 2018. Prior to joining Vera Bradley, Mr. Korney served as Vice President, GlobalMerchandising for Converse where he introduced the Global Merchandising function in June 2015. Between November 2012 and June 2015, he served asSenior Divisional Merchandise Manager for Fossil. From July 2011 to November 2012, he served as the General Merchandise Manager for Dallas CowboysMerchandising and from September 2006 to March 2009, he served as Global Vice President within various Merchandising and Creative functions at TheWalt Disney Company. Mr. Korney gained prior experience with Nautica, Ralph Lauren, and Gap.Beatrice Mac Cabe joined the Company in January 2016 as our Vice President – Design and was promoted to her current post as Chief Creative Officer inSeptember 2017. Prior to joining Vera Bradley, Ms. Mac Cabe served as Vice President, Chief Creative Director at Fossil since 2013 where she directed thedesign process from initial concept for lifestyle categories. From 2012 to 2013 she was Design and Merchandising Director, Private Brand Accessories for JCPenney and from 2011 to 2012 she was Creative Director, Handbags for Vince Camuto. Ms. Mac Cabe gained prior design and brand developmentexperience at other fashion brands including Diane von Furstenberg, John Galliano in Paris, and Marni in Milan.Stephanie Scheele has served as our Vice President – Marketing Strategy and Operations since 2015, leading the insights and customer database programsand overseeing the marketing strategy team. Ms. Scheele was named Chief Marketing Officer in April 2018. Ms. Scheele has spent 16 years with Vera Bradleyin various roles of increasing responsibility.Mark C. Dely joined the Company in August 2016 as our Vice President, Chief Legal Officer and Corporate Secretary and was promoted to also serve as theChief Administrative Officer in September 2017. Between January 2013 and August 2016, Mr. Dely served as Senior Vice President, Chief Legal Officer,General Counsel and Secretary of Fred’s, Inc., a publicly-traded retailer and pharmacy with over 650 locations throughout the Southeast. From July 2007 toDecember 2012, Mr. Dely was Vice President and Divisional General Counsel of the Franchise Services Group for The ServiceMaster Company, where hemanaged the legal function for the Company's global franchise businesses. Mr. Dely’s additional experience includes being the first in-house counsel forNYSE-listed seed and agricultural-biotech company, Delta & Pine Land Company. Mr. Dely began his legal career at New York law firm Fried Frank, LLP. Heearned his law degree from the New York University School of Law.Mary Beth Trypus joined the Company in May 2016 as our Vice President – Global Wholesale Sales and was promoted to her current post as Chief SalesOfficer in March 2018. Prior to joining Vera Bradley, from September 2015 to May 2016, Ms. Trypus consulted for accessories start-ups and non-profitbusinesses where she developed brand architecture, defined the financial structure, and engineered sales and customer acquisition strategy. From August2014 to August 2015, she was E.V.P. Sales and Marketing for Bulova Corporation where she drove marketing strategy and revenue growth across a multi-brand watch portfolio in the wholesale and e-commerce channels. From March 2011 to July 2014, Ms. Trypus was S.V.P. Sales and Planning at Nine WestGroup in the handbag division and held prior leadership positions at Liz Claiborne, Inc. and May Department Stores.Available InformationOur Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to these reports filed or furnishedpursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge on our website, www.verabradley.com, as soon asreasonably practicable after they are filed with or furnished to the Securities and Exchange Commission (“SEC”). No information contained on our website isintended to be included as part of, or incorporated by reference into, this Annual Report on Form 10-K.14Table of ContentsItem 1A. Risk FactorsYou should carefully consider all of the information in this report, including the following factors, which could materially affect our business, financialcondition, and results of operations in future periods. The risks described below are not the only risks that we face. Additional risks not currently known tous, or that we currently deem to be immaterial, also may materially adversely affect our business, financial condition, and results of operations in futureperiods.Risks Related to Our BusinessIf we are unable to successfully implement our long-term strategic plan, including Vision 20/20, and growth strategies, our future operating results couldsuffer.In fiscal 2018, we began to implement our Vision 20/20 plan, which is integrated into our long-term strategic plan, aimed to turnaround our business andrestore brand and Company health over the next three years. The success of our long-term strategic plan and growth strategies, alone or collectively, willdepend on various factors, including the appeal of our product designs, retail presentation to consumers, effectiveness of our marketing initiatives, expensesaving initiatives, competitive conditions, and economic conditions. There is no assurance that we will be able to successfully implement our strategic planand Vision 20/20 initiatives. If we are unsuccessful in implementing some or all of our strategies or initiatives, our future operating results could be adverselyimpacted.Changes in general economic conditions, and their impact on consumer confidence and consumer spending, could adversely impact our results ofoperations.Our performance is subject to general economic conditions and their impact on levels of consumer confidence and consumer spending. Consumer confidenceand consumer spending may be influenced by fluctuating interest rates and credit availability, changing fuel and other energy costs, fluctuating commodityprices, levels of unemployment and consumer debt levels, changes in net worth based on market conditions, general uncertainty regarding the overall futureeconomic environment, and weather and weather-related phenomena. Consumer purchases of discretionary items, including our merchandise, generallydecline during periods when disposable income is adversely affected or there is economic uncertainty, and this could adversely impact our results ofoperations. In the event that the U.S. economy worsens, or if there is a decline in consumer-spending levels or other unfavorable conditions, includinginflation, we could experience lower than expected net revenues, which could force us to delay or slow the implementation of our growth strategies andadversely impact our results of operations.Our inability to predict and respond in a timely manner to changes in consumer demand could adversely affect our net revenues and results of operations.Our success depends on our ability to gauge the fashion tastes of our customers and to provide merchandise that satisfies consumer demand in a timelymanner. Our products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to rapid change. Wecannot assure you that we will be able to develop appealing patterns and styles or meet changing consumer demands in the future. If we misjudge the marketfor our products, we may be faced with significant excess inventories for some products and missed opportunities for other products. In addition, changes toour product assortment and to our available fabrications, as well as the availability and breadth of pattern assortment may not gain consumer acceptance.Merchandise misjudgments could adversely impact our net revenues and results of operations.We may continue to experience declines in comparable sales and there can be no guarantee that the strategic initiatives we are implementing to improveour results will be successful.We may not be able to regain the levels of comparable sales that we have experienced in the past, and comparable sales may also further deteriorate. If ourfuture comparable sales fail to meet market expectations, then the price of our common stock could decline. Also, the aggregate results of operations of ourstores have fluctuated in the past and will fluctuate in the future. Numerous factors influence comparable sales, including fashion trends, competition,national and regional economic conditions, pricing, inflation, the timing of the release of new merchandise and promotional events, changes in ourmerchandise mix, marketing programs, changes in consumer shopping trends, site selection strategy, and weather conditions. These factors may cause ourcomparable sales results to be lower in the future than in recent periods or lower than expectations, either of which could result in a decline in the price of ourcommon stock.If our multi-channel distribution model is not successful, our business and results of operations may suffer.We currently sell into two segments: Direct to consumers through our full-line and factory outlet stores in the United States, verabradley.com, our onlineoutlet site, direct-to-consumer eBay sales, and our annual outlet sale in Fort Wayne, Indiana; and through our Indirect wholesale business which consists ofsales to approximately 2,400 specialty retail locations, substantially all of which are located in the United States, as well as department stores, nationalaccounts, third party e-commerce sites,15Table of Contentsthird-party inventory liquidators, and sales generated through licensing agreements. These channels are sometimes in direct competition and sales throughthese channels may not be incremental to total sales.We may not be able to successfully open new stores and/or operate new and current stores as planned, which could adversely impact our results ofoperations.Our long-term future growth includes our ability to successfully open and operate new and current stores. In recent years, however, comparable store saleshave declined. Consequently, the rate in which we have opened new stores has slowed and we do not currently have any new full-line stores planned to beopened during fiscal 2019. As part of our Vision 20/20 initiatives, we are forecasting to close up to an additional 45 full-line stores by the end of fiscal 2021.We have closed nine underperforming stores since December 2014. We plan to open six new factory outlet stores during fiscal 2019 and will continue toevaluate our plans for store openings in future years in light of demand and store performance.Our ability to successfully open and operate stores depends on many factors, including our ability to:•identify suitable store locations, the availability of which may be uncertain;•negotiate acceptable lease terms, including desired tenant improvement allowances;•hire, train, and retain store personnel and management;•assimilate new store personnel and management into our corporate culture;•source and manufacture inventory; and•successfully integrate new stores into our existing operations and information technology systems.The success of new store openings may also be affected by our ability to initiate marketing efforts in advance of opening our first store in a particular region.Additionally, we will incur pre-opening costs and we may encounter initial losses while new stores commence operations, which could strain our resourcesand adversely impact our results of operations.Our business depends on a strong brand. If we are unable to execute our marketing strategy, intended to enhance our brand, then revenues and our resultsof operations could be adversely impacted.We believe that the brand image that we have developed has contributed significantly to the success of our business. We also believe that enhancing the VeraBradley brand through our marketing strategy is critical to maintaining and expanding our customer base. Enhancing our brand and implementing ourmarketing strategy may require us to make substantial investments in areas such as product design, store operations, store design, community relations, andmarketing. These investments might not succeed. If we are unable to successfully execute our brand strategy, our results of operations could be adverselyimpacted.Our results of operations could suffer if we lose key management or design associates or are unable to attract and retain the talent required for ourbusiness.Our performance depends largely on the efforts and abilities of our senior management and product development teams. These executives and designassociates have substantial experience in our business and have made significant contributions to our growth and success. Although we have entered into anemployment agreement with our Chief Executive Officer, we may not be able to retain his services or those of other key individuals in the future. Theunexpected loss of services of key employees could have adverse impacts on our business and results of operations. As our business grows and we open newstores, we will need to attract and retain additional qualified employees and develop, train, and manage an increasing number of management-level, sales,and other employees. Competition for qualified employees is intense. We cannot assure you that we will be able to attract and retain employees as needed inthe future.Our results of operations are subject to quarterly fluctuations, which could adversely affect the market price of our common stock.Our quarterly results of operations may fluctuate significantly as a result of a variety of factors, including, among other things:•timing of new store openings and store closings;•net revenues and profits contributed by new stores;•increases or decreases in store traffic and comparable sales;•shifts in the timing of holidays, particularly in the United States and China;•changes in our merchandise mix;•timing of marketing campaigns or promotions;16Table of Contents•timing of sales to Indirect retailers; and•timing of new pattern and collection releases and new product introductions.Any quarterly fluctuations that we report in the future may not match the expectations of market analysts and investors. This could cause the trading price ofour common stock to fluctuate significantly.A data security or privacy breach could damage our reputation and our relationships with our customers, expose us to litigation risk and adversely affectour business.On September 15, 2016, we received information from law enforcement regarding a potential data security issue related to our retail store network. Findingsfrom the investigation showed unauthorized access to our payment processing system and the installation of a program that looked for payment card data.The program was specifically designed to find track data in the magnetic stripe of a payment card that may contain the card number, cardholder name,expiration date, and internal verification code as the data was being routed through the affected payment systems. Although we believe that we have resolvedthis incident, as more fully described within Management's Discussion and Analysis of Financial Condition and Results of Operations herein, we remaindependent on information technology systems and networks, including the Internet, for a significant portion of our sales, primarily through our e-commerceoperations and credit card transaction authorization and processing. We are also responsible for storing data relating to our customers and employees and relyon third parties for the operation of our e-commerce websites and for the various social media tools and websites we use as part of our marketing strategy. Aspart of our normal course of business, we often collect, retain, and transmit certain sensitive and confidential customer information, including credit cardinformation, over public networks. There is a significant concern by consumers and employees over the security of personal information transmitted over theInternet, consumer identity theft and user privacy. Despite the security measures we currently have in place, our facilities and systems and those of our third-party service providers may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or humanerrors, or other similar events. Any electronic or physical security breach involving the misappropriation, loss or other unauthorized disclosure ofconfidential or personally identifiable information, including penetration of our network security, whether by us or by a third party, could disrupt ourbusiness, severely damage our reputation and our relationships with our customers, expose us to risks of litigation and liability and adversely affect ourbusiness and results of operations. We do not control third-party service providers and cannot guarantee that electronic or physical computer break-ins andsecurity breaches will not occur in the future. Any perceived or actual unauthorized disclosure of personally identifiable information regarding our customersor website visitors could harm our reputation and credibility, reduce our e-commerce net sales, impair our ability to attract website visitors, and reduce ourability to attract and retain customers. We may also incur significant costs in complying with the various applicable state, federal, and foreign laws regardingunauthorized disclosure of personal information.Our business could suffer if our computer systems and websites are disrupted or cease to operate effectively.We are dependent on our computer systems to record and process transactions and manage and operate our business, including in designing, marketing,manufacturing, importing, tracking and distributing our products, processing payments, and accounting for and reporting results. We also utilize anautomated replenishment system to facilitate the processing of basic replenishment orders, the movement of goods through distribution channels, and thecollection of information for planning and forecasting. In addition, we have an e-commerce website in the U.S. Given the complexity of our business and thesignificant number of transactions that we engage in on an annual basis, it is imperative that we maintain constant operation of our computer hardware andsoftware systems. Despite our preventive efforts, our systems are vulnerable from time to time to damage or interruption from, among other things, securitybreaches, computer viruses or power outages. Any material disruptions in our information technology systems could have a material adverse effect on ourbusiness, financial condition and results of operations.We are exposed to business risks as a result of our e-commerce operations.We operate an e-commerce store at www.verabradley.com, which includes an online outlet site we created in fiscal 2018. Expanding our e-commerce businessis one of the key objectives of our business strategy. Our e-commerce operations are subject to numerous risks, including unanticipated operating problems,reliance on third-party computer hardware and software providers, system failures and the need to invest in additional computer systems. Specific risksinclude: (i) diversion of sales from our stores; (ii) rapid technological change; (iii) liability for e-commerce content; and (iv) risks related to the failure of thecomputer systems that operate the websites and their related support systems, including from computer viruses, telecommunication failures and electronicbreak-ins and similar disruptions. Internet operations involve risks which may be beyond our control that could have a direct material adverse effect on ouroperating results, including: (i) price competition involving the items we intend to sell; (ii) the entry of our vendors into the Internet business in directcompetition with us; (iii) the level of merchandise returns experienced by us; (iv) governmental regulation; (v) e-commerce security breaches involving17Table of Contentsunauthorized access to our and/or customer information; (vi) credit card fraud; and (vii) competition and general economic conditions specific to the Internet,e-commerce, and the accessories industry. Our inability to effectively address these risks and any other risks that we face in connection with our Internetoperations could materially adversely affect our business, financial condition, results of operations, and/or cash flows.Closing stores could result in significant costs to us.Since December 2014, we have closed nine underperforming stores and are forecasting to close 45 additional full-line stores by the end of fiscal 2021,primarily as leases expire. We could, in the future, decide to close additional stores that are producing losses or that are not as profitable as we expect. If wedecide to close any stores before the expiration of their lease terms, we may incur payments to landlords to terminate or “buy out” the remaining term of thelease. We also may incur costs related to the employees at such stores, whether or not we terminate the leases early. Upon any such closure, the closing costs,including fixed assets and inventory write-downs, could adversely affect our results and could adversely affect our cash on hand.Our ability to attract customers to our stores depends heavily on the success of the shopping centers in which many of our stores are located.Substantially all of our Direct stores are located in regional mall shopping centers, and many of our Indirect customers are also located in these shoppingcenters. Factors beyond our control impact mall traffic, such as general economic conditions and consumer spending levels. Consumer spending and malltraffic have been depressed in recent years. As a result, mall operators have been facing increasing operational and financial difficulties. The increasinginability of mall “anchor” tenants and other area attractions to generate consumer traffic around our stores, the increasing inability of mall operators to attract“anchor” tenants and maintain viable operations, and the increasing departures of existing “anchor” and other mall tenants due to declines in the salesvolume and in the popularity of certain malls as shopping destinations, have reduced and may continue to reduce our sales volume and, consequently,adversely affect our financial condition, results of operations, and cash flows.We are subject to risks associated with leasing substantial amounts of space, including future increases in occupancy costs.We lease all of our store locations. We typically occupy our stores under operating leases with terms of ten years. We have been able to negotiate favorablerental rates in recent years due in part to the state of the economy and high vacancy rates within some shopping centers, but there is no assurance that we willbe able to continue to negotiate such favorable terms. Some of our leases have early cancellation clauses, which permit the lease to be terminated by us or thelandlord if certain sales levels are not met in specific periods or if the shopping center does not meet specified occupancy standards. In addition to requiringfuture minimum lease payments, some of our store leases provide for the payment of common area maintenance charges, real property insurance, and realestate taxes. Many of our lease agreements have escalating rent provisions over the initial term and any extensions. If we expand our store base, our leaseexpense and our cash outlays for rent under lease agreements will increase. Our substantial operating lease obligations could have significant negativeconsequences, including:•requiring that a substantial portion of our available cash be applied to pay our rental obligations, thus reducing cash available for other purposes;•increasing our vulnerability to general adverse economic and industry conditions;•limiting our flexibility in planning for or reacting to changes in our business or industry; and•limiting our ability to obtain additional financing.Any of these consequences could place us at a disadvantage with respect to our competitors. We depend on cash flow from operating activities to pay ourlease expenses and to fulfill our other cash needs. If our business does not generate sufficient cash flow from operating activities to fund these expenses andneeds, we may not be able to service our lease expenses, grow our business, respond to competitive challenges, or fund our other liquidity and capital needs,which would harm our business.Additional sites that we lease may be subject to long-term non-cancelable leases if we are unable to negotiate our current standard lease terms. If an existingor future store is not profitable, and we decide to close it, we may nonetheless be committed to perform our obligations under the applicable lease, includingpaying the base rent for the balance of the lease term. Moreover, even if a lease has an early cancellation clause, we may not satisfy the contractualrequirements for early cancellation under the lease. Our inability to enter new leases or renew existing leases on acceptable terms or be released from ourobligations under leases for stores that we close would, in any such case, affect us adversely.Our failure to effectively compete with other retailers for sales could have a material adverse effect on our financial condition, results of operations, andcash flows.The market for bags, accessories, and travel items is increasingly competitive. Our competitive challenges include:•attracting customer traffic;18Table of Contents•sourcing and manufacturing merchandise efficiently;•competitively pricing our products and achieving customer perception of value;•maintaining favorable brand recognition and effectively marketing our products to consumers in diverse market segments;•developing designs that appeal to a broad range of demographic and age segments;•developing high-quality products;•offering attractive promotional incentives while maintaining profit margins; and•establishing and maintaining good working relationships with our Indirect retailers.In our Indirect business, we compete with numerous manufacturers, importers, and distributors of handbags, accessories, and other products for the limitedspace available for the display of such products to the consumer. In our Direct business, we compete against other gift and specialty retailers, departmentstores, catalog retailers, and Internet businesses that engage in the retail sale of similar products. Moreover, the general availability of contract manufacturingallows new entrants easy access to the markets in which we compete, which may increase the number of competitors and adversely affect our competitiveposition and our business.In addition, in light of a continued difficult consumer environment, pricing is a significant driver of consumer choice in our industry and we regularly engagein price competition, particularly through our promotional programs. To the extent that we decrease our promotional activity, our ability to maintain saleslevels may be impacted.We rely on various contract manufacturers to produce all of our products and generally do not have long-term contracts with our manufacturers.Our various contract manufacturers produce all of our products. We generally do not enter into long-term formal written agreements with our manufacturersand instead transact business with each of them on an order-by-order basis. In the event of a disruption in our contract manufacturers’ systems, we may beunable to locate alternative manufacturers of comparable quality at an acceptable price, or at all. Identifying a suitable manufacturer is an involved processthat requires us to become satisfied with the prospective manufacturer’s quality control, responsiveness and service, financial stability, labor practices, andenvironmental compliance. Any delay, interruption, or increased cost in the manufactured products that might occur for any reason, such as the lack of long-term contracts or regulatory requirements and the loss of certifications, power interruptions, fires, hurricanes, war, or threats of terrorism, could affect ourability to meet customer demand for our products, adversely affect our net revenues, increase our cost of sales, and hurt our results of operations. In addition,manufacturing disruption could injure our reputation and customer relationships, thereby harming our business.19Table of ContentsWe rely on various suppliers to supply a significant majority of our raw materials.We generally do not enter into long-term formal written agreements with our suppliers and typically transact business with each of them on an order-by-orderbasis. In the event of a significant disruption in the supply of fabrics or raw materials from our current sources, we may not be able to locate alternativesuppliers of materials of comparable quality at an acceptable price, or at all. In such a case, we could have difficulty meeting consumer demand and netrevenues could be adversely impacted.We rely on a single distribution facility for all of the products we sell.Our distribution operations are currently concentrated in a single, company-owned distribution center in Roanoke, Indiana. Any significant disruption in theoperation of the facility due to natural disaster or severe weather, or events such as fire, accidents, power outages, system failures, or other unforeseen causes,could devalue or damage a significant portion of our inventory and could adversely affect our product distribution and sales until such time as we couldsecure an alternative facility. If we encounter difficulties with our distribution facility or other problems or disasters arise, we cannot ensure that criticalsystems and operations will be restored in a timely manner or at all, and this would have a material adverse effect on our business. In addition, growth couldrequire us to further expand our current facility, which could affect us adversely in ways that we cannot predict.The cost of raw materials could increase our cost of sales and cause our results of operations to suffer.Fluctuations in the price, availability, and quality of fabrics or other raw materials used to manufacture our products, as well as the price for labor, marketing,and transportation, could have adverse impacts on our cost of sales and our ability to meet our customers’ demands. In particular, fluctuations in the price ofcotton, our primary raw material, could have an adverse impact on our cost of sales. In addition, because a key component of our products is petroleum-based,the cost of oil affects the cost of our products. Upward movement in the price of oil in the global oil markets would also likely result in rising fuel and freightprices, which could increase our shipping costs. In the future, we may not be able to pass all or a portion of higher costs on to our customers.Our business is subject to the risks inherent in global sourcing and manufacturing activities.We source our fabrics primarily from manufacturers in China and South Korea and outsource the production of a significant majority of our products tocompanies in Asia. We are subject to the risks inherent in global sourcing and manufacturing, including, but not limited to:•exchange rate fluctuations and trends;•availability of raw materials;•compliance with labor laws and other foreign governmental regulations;•compliance with U.S. import and export laws and regulations;•disruption or delays in shipments;•loss or impairment of key manufacturing sites;•product quality issues;•political unrest;•natural disasters, acts of war and terrorism, changing macroeconomic trends, and other external factors over which we have no control; and•quotas, duties, tariffs, or other trade restrictions or regulations.Significant disruption of manufacturing for any of the above reasons could interrupt product supply and, if not remedied in a timely manner, could have anadverse impact on our results of operations. Additionally, we do not have complete oversight over our contract manufacturers. Violation of labor or otherlaws by those manufacturers, or the divergence of a contract manufacturer’s labor or other practices from those generally accepted as ethical in the UnitedStates or in other markets in which we may in the future do business, could also draw negative publicity for us and our brand, diminishing the value of ourbrand and reducing demand for our products.20Table of ContentsOur ability to source our products at favorable prices, or at all, could be harmed, with adverse effects on our results of operations, if new trade restrictionsare imposed or if existing trade restrictions become more burdensome.A significant majority of our products are currently manufactured for us in Asia. The United States and the countries in which our products are produced haveimposed and may impose additional quotas, duties, tariffs, or other restrictions or regulations or may adversely adjust prevailing quotas, duties, or tariffs.Countries impose, modify, and remove tariffs and other trade restrictions in response to a diverse array of factors, including global and national economic andpolitical conditions, which make it impossible for us to predict future developments regarding tariffs and other trade restrictions. Trade restrictions, whichinclude embargoes, safeguards, and customs restrictions, could increase the cost or reduce the supply of products available to us or could require us to modifyour supply chain organization or other current business practices, any of which could harm our results of operations.We may be subject to unionization, work stoppages, slowdowns, or increased labor costs.Currently, none of our employees are represented by a union. Nevertheless, our employees have the right at any time under the National Labor Relations Actto organize or affiliate with a union. If some or all of our workforce were to become unionized, our business could be exposed to work stoppages andslowdowns as a unionized business. In addition, if the terms of the collective bargaining agreement were significantly more favorable to union workers thanour current pay-and-benefits arrangements, our costs would increase and our results of operations would suffer.We rely on independent transportation providers for substantially all of our product shipments.We currently rely on independent transportation service providers for substantially all of our product shipments. Our utilization of these delivery services, orthose of any other shipping companies that we may elect to use, is subject to risks, including increases in fuel prices, which would increase our shippingcosts, employee strikes and inclement weather, which may impact the shipping company’s ability to provide delivery services sufficient to meet our shippingneeds.If for any reason we were to change shipping companies, we could face logistical difficulties that might adversely affect deliveries, and we would incur costsand expend resources in the course of making the change. Moreover, we might not be able to obtain terms as favorable as those received from the serviceproviders that we currently use, which in turn would increase our costs. We also would face shipping and distribution risks and uncertainties associated withany expansion of our distribution facility and related systems.Our inability or failure to protect our intellectual property or our infringement of other’s intellectual property could have a negative impact on ouroperating results.We believe that our registered copyrights, registered and common law trademarks, and other proprietary rights have significant value and are critical to ourability to create and sustain demand for our products. Although we have not been inhibited from selling our products in connection with intellectual propertydisputes, we cannot assure you that obstacles will not arise as we expand our product line and extend our brand as well as the geographic scope of our salesand marketing. We also cannot assure you that the actions taken by us to establish and protect our proprietary rights will be adequate to prevent imitation ofour products or infringement of our rights by others. The legal regimes of some foreign countries, particularly China, may not protect proprietary rights to thesame extent as the laws of the United States, and it may be more difficult for us to successfully challenge the use of our proprietary rights by others in thesecountries. The loss of copyrights, trademarks, and other proprietary rights could adversely impact our results of operations. Any litigation regarding ourproprietary rights could be time consuming and costly.We are also subject to the risk that claims will be brought against us for infringement of the intellectual property rights of third parties, seeking to block thesale of our products considered to violate their intellectual property rights or payment of monetary amounts. In particular, we are subject to copyrightinfringement claims for which we may not be entitled to indemnification from our suppliers. In addition, in recent years, companies in the retail industry,including us, have been subject to patent infringement claims from non-practicing entities, or “patent trolls.” Any infringement or other intellectual propertyclaim made against us, whether or not it has merit, could be time-consuming and result in costly litigation. As a result, any such claim, or the combination ofmultiple claims, could have a material adverse effect on our operating results. If we are required to stop using any of our registered or nonregisteredtrademarks, our sales could decline and, consequently, our business and results of operations could be adversely affected.Fluctuations in our tax obligations and effective tax rate may result in volatility of our operating results and stock price.We are subject to income taxes in many U.S. and certain foreign jurisdictions. We record tax expense based on our estimates of future payments, whichincludes reserves for uncertain tax positions in multiple tax jurisdictions. At any one time, many tax years are subject to audit by various taxing jurisdictions.Further, possible changes in federal, state, local, and non-U.S. tax laws21Table of Contentsbearing upon our revenues, income, property, or other aspects of our operations or business would, if enacted, affect our results of operations in ways and to adegree that we cannot currently predict.On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. The Tax Act includes, among other things, a corporate tax ratedecrease from 35% to 21% effective for tax years beginning after December 31, 2017, bonus depreciation that will allow for full expensing for qualifiedproperty, the transition of U.S. international taxation from a worldwide system to a territorial system, and a one-time transition tax on the mandatory deemedrepatriation of cumulative foreign earnings as of December 31, 2017. Section 15 of the Internal Revenue Code stipulates that our fiscal year ending February3, 2018, has a blended federal statutory tax rate of approximately 32.9%, which is based on the applicable tax rates before and after the effectiveness of theTax Act.The Company recorded $2.1 million in provisional income tax expense during the fourth quarter of fiscal 2018 based upon its understanding of the Tax Actand guidance as of the date of this filing.The ultimate impact of the Tax Act may differ from the provisional income tax expense recognized in the consolidated financial statements during the fourthquarter of fiscal 2018. The accounting for the Tax Act is expected to be complete when the fiscal 2018 federal income tax return is filed in fiscal 2019. Anyresulting changes to the provisional estimates and amounts not yet estimated will be recognized as an adjustment to tax expense in the reporting period thatthe amounts are determined. These provisional amounts may differ due to, among other things, additional analysis, changes in interpretations andassumptions that the Company has made, additional regulatory guidance issued, and any additional actions the Company may take as a result of the Tax Act.Any of these items could lessen or increase certain adverse impacts of the Tax Act. Further, there may be material adverse effects on our business, results ofoperations, and liquidity resulting from the Tax Act that we have not yet identified.We have recorded asset impairment charges in the past and we may record material asset impairment charges in the future.Quarterly, we assess whether events or changes in circumstances have occurred that indicate the carrying value of long-lived assets may not be recoverable. Ifwe determine that the carrying value of long-lived assets is not recoverable, we will be required to record impairment charges relating to those assets. Forexample, our assessments during fiscal 2018 indicated that operating losses or insufficient operating income existed at certain retail stores, with a projectionthat the operating losses or insufficient operating income for those locations would continue. As such, we recorded non-cash charges of $6.3 million duringfiscal 2018 within selling, general, and administrative expenses in the consolidated statements of operations to write down the carrying values of these stores'long-lived assets to their estimated fair values.Our quarterly evaluation of store assets includes consideration of current and historical performance and projections of future profitability. The profitabilityprojections rely upon estimates made by us, including store-level sales, gross margins, and direct expenses, and, by their nature, include judgments abouthow current strategic initiatives will impact future performance. If we are not able to achieve the projected key financial metrics for any reason, includingbecause any of the strategic initiatives being implemented do not result in significant improvements in our current financial performance trend, this wouldindicate that the value of our long-lived assets was not recoverable and we would incur additional impairment of assets in the future.In the event we record additional impairment charges, this could have a material adverse effect on our results of operations and financial condition.Our Indirect business could suffer as a result of decisions by our Indirect retailers to decrease or eliminate the amount of merchandise purchased from us.We do not enter into long-term agreements with any of our Indirect retailers. Instead, we enter into a number of purchase order commitments with ourcustomers for each of our lines every season. A decision by a significant number of Indirect retailers, whether motivated by competitive conditions,operational or financial difficulties, reduced access to capital, or otherwise, to decrease or eliminate the amount of merchandise purchased from us or tochange their manner of doing business with us could adversely impact our results of operations. Although we recommend retail sale prices for our products toour Indirect retailers, we typically do not provide dealer allowances or other economic incentives to support those prices. Possible promotional pricing ordiscounting by Indirect retailers in response to softening retail demand could have a negative effect on our brand image and prestige, which might bedifficult to counteract.Bankruptcies or other operational or financial difficulties of our Indirect retailers could adversely impact our business.We sell our Indirect merchandise primarily to specialty retail and department stores across the United States and extend trade credit based on an evaluation ofeach Indirect retailer’s financial condition, usually without requiring collateral. Perceived or actual financial difficulties of a customer could cause us tocurtail or eliminate business with that customer or could decrease demand for our products by that customer. Pending the resolution of a relationship with afinancially troubled Indirect retailer,22Table of Contentswe might assume credit risk that we would otherwise avoid relating to our receivables from that customer. Inability to collect on accounts receivable from ourIndirect retailers would adversely impact our results of operations.There are claims made against us from time to time that can result in litigation or regulatory proceedings, which could distract management from ourbusiness activities and result in significant liability or damage to our brand image.We increasingly face the risk of litigation and other claims against us. Litigation and other claims may arise in the ordinary course of our business andinclude employee claims, custom and duty claims, commercial disputes, intellectual property issues, product-oriented allegations, and slip and fall claims.Often these cases raise complex factual and legal issues, which are subject to risks and uncertainties and which could require significant management time.Litigation and other claims against us could result in unexpected expenses and liability, as well as materially adversely affect our operations and ourreputation.We may suffer negative publicity and our business may be harmed if we need to recall any products we sell.We have in the past needed to, and may in the future need to, recall products that we determine may present safety issues. If products we sell have safetyproblems of which we are not aware, or if we or the Consumer Product Safety Commission recall a product sold in our stores, we may suffer negative publicityand, potentially, product liability lawsuits, which could have a material adverse impact on our reputation, financial condition and results of operations orcash flows.Risks Related to the Securities Markets and Ownership of Our Common StockOur stock price may be volatile or may decline regardless of our operating performance, and you may not be able to resell shares at or above the price atwhich you purchase them.The market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including:•actions by other shopping mall or lifestyle center tenants;•weather conditions, particularly during the holiday shopping period;•unexpected departure of key executives;•financial projections that we may choose to provide to the public, any changes in these projections or our failure for any reason to meet theseprojections;•the public’s response to press releases or other public announcements by us or others, including our filings with the SEC and announcementsrelating to litigation and other matters;•speculation about our business in the press or the investment community;•future sales of our common stock by our significant shareholders, officers, and directors;•our entry into new markets;•changes in laws or regulations that impact the retail industry;•strategic actions by us or our competitors, such as acquisitions or restructurings; and•changes in accounting principles.These and other factors may result in a lower market price of our common stock, regardless of our actual operating performance.In addition, the stock markets, including The NASDAQ Global Select Market, have experienced extreme price and volume fluctuations that have affected andcontinue to affect the market prices of equity securities of many retail companies. In the past, stockholders have instituted securities class action litigationfollowing periods of market volatility. If we were involved in securities litigation, we could incur substantial costs and our resources and the attention ofmanagement could be diverted from our business.Our business could be negatively affected as a result of the actions of activist stockholders.Over the last few years, proxy contests and other forms of stockholder activism have been directed against numerous public companies in retail businesses.We could become engaged in a consent solicitation, or proxy contest, or experience other stockholder activism, in the future. Activist shareholders mayadvocate for certain governance and strategic changes at our company. In the event of stockholder activism, particularly with respect to matters which ourBoard of Directors (“Board”), in exercising their fiduciary duties, disagree with or have determined not to pursue, our business could be adversely affectedbecause responding to actions by activist stockholders can be costly and time-consuming, disrupting our operations and23Table of Contentsdiverting the attention of management, and perceived uncertainties as to our future direction may result in the loss of potential business opportunities andmay make it more difficult to attract and retain qualified personnel, business partners, and customers.In addition, if faced with a consent solicitation or proxy contest, we may not be able to respond successfully to the contest or dispute, which would bedisruptive to our business. If individuals are elected to our Board with a differing agenda, our ability to effectively and timely implement our strategic planand create additional value for our stockholders may be adversely affected.A limited number of shareholders control a large percentage of the voting power of our common stock, and therefore investors may have limited ability todetermine the outcome of shareholder votes.Michael Ray (our former CEO and Ms. Bradley Baekgaard's son in-law), Robert Hall, Barbara Bradley Baekgaard, Joan Hall (Mr. Hall’s wife and Ms. BradleyBaekgaard’s daughter), Patricia R. Miller, and P. Michael Miller, directly or indirectly, beneficially own and have the ability to exercise voting control over,in the aggregate, 36.7% of our outstanding shares of common stock as of February 3, 2018. As a result, these shareholders are able to exercise significantinfluence over all matters requiring shareholder approval, including the election of directors, any amendments to our second amended and restated articles ofincorporation, and significant corporate transactions. This concentrated ownership of outstanding common stock may limit your ability to influencecorporate matters, and the interests of these shareholders may not coincide with our interests or your interests. As a result, we may take actions that you do notbelieve to be in our interests or your interests and that could depress our stock price. In addition, this significant concentration of stock ownership mayadversely affect the trading price of our common stock should investors perceive disadvantages in owning shares of common stock in a company that hassuch concentrated ownership.Our actual operating results may differ significantly from our guidance, which could cause incongruous fluctuation in our stock price.From time to time, we provide guidance regarding our future performance that represents our management’s estimates as of the date of release. This guidance,which consists of forward-looking statements, is prepared by our management and is qualified by, and subject to, the assumptions and the other informationcontained or referred to in the release. Our guidance is not prepared with a view toward compliance with published guidelines of the American Institute ofCertified Public Accountants, and neither our independent registered public accounting firm nor any other independent expert or outside party compiles orexamines the guidance and, accordingly, no such person expresses any opinion or any other form of assurance with respect thereto.Guidance is based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significantbusiness, economic, and competitive uncertainties and contingencies, many of which are beyond our control and are based upon specific assumptions withrespect to future business decisions, some of which will change. We generally state possible outcomes as high and low ranges which are intended to provide asensitivity analysis as variables are changed, but are not intended to represent that actual results could not fall outside of the suggested ranges. The principalreason that we release this data is to provide a basis for our management to discuss our business outlook with analysts and investors. We do not accept anyresponsibility for any projections or reports published by any such persons.Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions of the guidance furnished by us will not materializeor will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date ofrelease. Actual results will vary from the guidance and the variations may be material. Investors should also recognize that the reliability of any forecastedfinancial data diminishes the further in the future that the data are forecast.In light of the foregoing, if investors, analysts, and others fail to review our guidance within the proper context or place undue reliance on our guidance,deviations from such guidance may result in incongruous fluctuation in our stock price.Anti-takeover provisions in our organizational documents and Indiana law may discourage or prevent a change in control, even if a sale of the Companywould be beneficial to our shareholders, which could cause our stock price to decline and prevent attempts by shareholders to replace or remove ourcurrent management.Our second amended and restated articles of incorporation and amended and restated bylaws contain provisions that may delay or prevent a change incontrol, discourage bids at a premium over the market price of our common stock, harm the market price of our common stock, and diminish the voting andother rights of the holders of our common stock. These provisions include:•dividing our board of directors into three classes serving staggered three-year terms;24Table of Contents•authorizing our board of directors to issue preferred stock and additional shares of our common stock without shareholder approval;•prohibiting shareholder action by written consent;•prohibiting our shareholders from calling a special meeting of shareholders;•prohibiting our shareholders from amending our amended and restated bylaws; and•requiring advance notice for raising business matters or nominating directors at shareholders’ meetings.As permitted by our second amended and restated articles of incorporation and amended and restated bylaws, our board of directors also has the ability,should they so determine, to adopt a shareholder rights agreement, sometimes called a “poison pill,” providing for the issuance of a new series of preferredstock to holders of common stock. In the event of a takeover attempt, this preferred stock would give rights to holders of common stock (other than thepotential acquirer) to buy additional shares of common stock at a discount, leading to the dilution of the potential acquirer’s stake. The adoption of a poisonpill, or the board’s ability to do so, can have negative effects such as those described above.As an Indiana corporation, we are governed by the Indiana Business Corporation Law (as amended from time to time, the “IBCL”). Under specifiedcircumstances, certain provisions of the IBCL related to control share acquisitions, business combinations, and constituent interests may delay, prevent, ormake more difficult unsolicited acquisitions or changes of control of us. These provisions also may have the effect of preventing changes in our management.It is possible that these provisions could make it more difficult to accomplish transactions that shareholders might deem to be in their best interest.25Table of ContentsItem 1B. Unresolved Staff CommentsNone. Item 2. PropertiesThe following table sets forth the location, use, and size of our distribution, corporate facilities, and showrooms as of February 3, 2018. The leases on theleased properties expire at various times through 2028, subject to renewal options. Location Primary Use Approximate Square Footage Leased/OwnedRoanoke, Indiana Corporate headquarters, designcenter, and showroom 188,000 OwnedRoanoke, Indiana Warehouse and distribution 428,500 OwnedNew York, New York Office and showroom 3,700 LeasedHong Kong Asia sourcing office 5,100 LeasedAtlanta, Georgia Showroom 5,200 LeasedDallas, Texas Showroom 1,800 LeasedLas Vegas, Nevada Showroom 2,200 LeasedAs of February 3, 2018, we also leased 166 store locations in the United States, including six store locations opened or to be opened in fiscal 2019. See belowfor more information regarding the locations of our open stores as of February 3, 2018.We consider these properties to be in good condition generally and believe that our facilities are adequate for our operations and provide sufficient capacityto meet our anticipated requirements. The properties in the above table are used by both the Direct segment and Indirect segment, excluding the threeshowrooms which are used exclusively by the Indirect segment.Store LocationsOur full-line stores are located primarily in high-traffic regional malls, lifestyle centers, and mixed-use shopping centers across the United States. Thefollowing table shows the number of full-line and factory outlet stores we operated in each state as of February 3, 2018: State Total Number ofFull-Line Stores Total Number ofFactory Outlet Stores State Total Number ofFull-Line Stores Total Number ofFactory Outlet StoresAlabama 1 1 Minnesota 2 1Arizona 3 — Missouri 2 2California 5 — Nebraska — 1Colorado 3 1 Nevada — 1Connecticut 2 1 New Jersey 9 1Delaware 1 1 New York 8 3Florida 7 8 North Carolina 2 4Georgia 2 2 Ohio 4 1Hawaii 2 1 Oklahoma 2 1Illinois 6 1 Pennsylvania 5 2Indiana 2 2 Rhode Island 1 —Iowa 1 1 South Carolina — 1Kansas 1 — Tennessee 3 2Kentucky 2 1 Texas 13 6Louisiana 2 — Virginia 3 2Maryland 4 — Wisconsin 1 —Massachusetts 5 1 Totals 109 51Michigan 5 2 26Table of ContentsWe lease all of our stores. Lease terms for our retail stores are generally ten years with options to renew for varying terms. The leases generally provide for afixed minimum rental plus contingent rent, which is determined as a percentage of sales in excess of specified levels. Item 3. Legal ProceedingsWe may be involved from time to time, as a plaintiff or a defendant, in various routine legal proceedings incident to the ordinary course of our business. Inthe ordinary course, we are involved in the policing of our intellectual property rights. As part of our policing program, from time to time we file lawsuits inthe United States and abroad, alleging acts of trademark counterfeiting, trademark infringement, trademark dilution, and ancillary and pendent state andforeign law claims. These actions often result in seizure of counterfeit merchandise and negotiated settlements with defendants. Defendants sometimes raiseas affirmative defenses, or as counterclaims, the purported invalidity or unenforceability of our proprietary rights. We believe that the outcome of all pendinglegal proceedings in the aggregate will not have a material adverse effect on our business or financial condition. Item 4. Mine Safety DisclosureNot Applicable27Table of ContentsPART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesOur common stock is listed on the NASDAQ Global Select Market under the symbol “VRA”. The following table sets forth the high and low sales prices ofour common stock, as reported by the NASDAQ Global Select Market, for each quarterly period in our two most recent fiscal years: High LowFiscal 2018 Quarter ended: February 3, 2018 $12.83 $6.99October 28, 2017 11.40 7.25July 29, 2017 10.24 7.70April 29, 2017 11.60 8.40Fiscal 2017 Quarter ended: January 28, 2017 $15.86 $11.29October 29, 2016 17.20 12.97July 30, 2016 17.84 13.55April 30, 2016 20.69 13.71As of March 27, 2018, we had approximately 25 registered shareholders of record. The number of shareholders of record is based upon the actual number ofshareholders registered at such date and does not include holders of shares in “street name” or persons, partnerships, associations, corporations, or otherentities identified in security position listings maintained by depositories.Unregistered Sales of Equity Securities and Use of ProceedsOn December 8, 2015, the Company's board of directors approved a share repurchase program (the “2015 Share Repurchase Program”) authorizing up to$50.0 million of repurchases of shares of the Company's common stock. On November 30, 2017, the board of directors authorized the Company to extend the2015 Share Repurchase Plan to December 31, 2018. The prior share repurchase program (the “2014 Share Repurchase Program”) was approved by the boardof directors on September 9, 2014, and authorized share repurchases up to $40.0 million. The 2014 Share Repurchase Program was completed in fiscal 2016.During the fiscal year ended February 3, 2018, the Company purchased and held 934,031 shares at an average price of $8.47 per share, excludingcommissions, for an aggregate amount of $7.9 million, under the 2015 Share Repurchase Program.During the fiscal year ended January 28, 2017, the Company purchased and held 1,606,102 shares at an average price of $15.27 per share, excludingcommissions, for an aggregate amount of $24.5 million, under the 2015 Share Repurchase Program.During the fiscal year ended January 30, 2016, the Company purchased and held 2,481,367 shares at an average price of $12.57 per share, excludingcommissions, for an aggregate amount of $31.2 million. Of these purchases, 283,354 shares at an average price of $14.64 per share, for an aggregate amountof $4.1 million, were purchased under the 2015 Share Repurchase Plan.As of February 3, 2018, there was $13.4 million remaining available to repurchase shares of the Company's common stock under the 2015 Share RepurchaseProgram.As of February 3, 2018, the Company held as treasury shares 5,642,485 shares of its common stock at an average price of $13.57 per share, excludingcommissions, for an aggregate carrying amount of $76.6 million. The Company’s treasury shares may be issued under the 2010 Equity and Incentive Plan orfor other corporate purposes.28Table of ContentsDetails on the shares repurchased under the program during the fourteen weeks ended February 3, 2018 are as follows:PeriodTotal Number of SharesPurchased Average Price Paid perShare Total Number of SharesPurchased as Part ofPublicly Announced Plansor Programs Maximum ApproximateDollar Value of Sharesthat May Yet be PurchasedUnder the Plans orProgramsOctober 29, 2017 - November 25, 2017168,377 $7.47 168,377 $13,807,827November 26, 2017 - December 30, 201745,133 8.54 45,133 13,422,471December 31, 2017 - February 3, 2018— — — 13,422,471 213,510 $7.70 213,510 DividendsOur common stock began trading on October 21, 2010, following our initial public offering. Since that time, we have not declared any cash dividends, andwe do not anticipate declaring any cash dividends in the foreseeable future.29Table of ContentsStock Performance GraphThe graph set forth below compares the cumulative shareholder return on our common stock between February 2, 2013, and February 3, 2018, to thecumulative return of (i) the S&P 500 Index and (ii) the S&P 500 Apparel, Accessories, and Luxury Goods Index over the same period. This graph assumes aninitial investment of $100 on February 2, 2013, in our common stock, the S&P 500 Index, and the S&P 500 Apparel, Accessories, and Luxury Goods Indexand assumes the reinvestment of dividends, if any.The comparisons shown in the graph below are based on historical data. We caution that the stock price performance presented in the graph below is notnecessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock. Information used in the graph was obtainedfrom The NASDAQ Stock Market website. As such, although we believe the information to be accurate, we cannot assure you of its accuracy.Company/Market/Peer Group 2/2/2013 2/1/2014 1/31/2015 1/30/2016 1/28/2017 2/3/2018Vera Bradley, Inc. $100.00 $93.10 $73.91 $57.29 $44.96 $36.16S&P 500 Index $100.00 $120.30 $137.42 $136.50 $164.99 $202.66S&P 500 Apparel, Accessories, and Luxury Goods Index $100.00 $115.95 $120.21 $100.72 $85.81 $109.5330Table of Contents Item 6. Selected Financial DataThe following tables present selected consolidated financial and other data as of and for the years indicated. The selected income statement data for the mostrecent three fiscal years presented and the selected balance sheet data as of February 3, 2018 and January 28, 2017 are derived from our audited consolidatedfinancial statements included in Item 8 of this report. The selected income statement data for the fiscal years ended January 31, 2015, and February 1, 2014,and selected balance sheet data as of January 30, 2016, January 31, 2015, and February 1, 2014, are derived from our audited consolidated financialstatements that are not included elsewhere in this report. These results include adjustments necessary for comparability, including discontinued operationsrelated to our former Japan operations which occurred during fiscal 2015. The historical results presented below are not necessarily indicative of the results tobe expected for any future period. You should read this selected consolidated financial and other data in conjunction with the consolidated financialstatements and related notes and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”appearing elsewhere in this report. 31Table of Contents Fiscal Year Ended (1)($ in thousands, except per share data and asotherwise indicated) February 3, 2018 January 28, 2017 January 30, 2016 January 31, 2015 February 1, 2014Consolidated Statement of IncomeData (2): Net revenues $454,648 $485,937 $502,598 $508,990 $530,896Cost of sales 200,639 209,891 221,409 239,981 238,684Gross profit 254,009 276,046 281,189 269,009 292,212Selling, general, and administrativeexpenses (6) 239,810 249,155 236,836 208,675 201,231Other income 782 1,329 2,369 3,736 4,776Operating income 14,981 28,220 46,722 64,070 95,757Interest (income) expense, net (413) 178 263 407 571Income from continuing operationsbefore income taxes 15,394 28,042 46,459 63,663 95,186Income tax expense (7) 8,378 8,284 18,901 22,828 35,057Income from continuing operations 7,016 19,758 27,558 40,835 60,129Loss from discontinued operations, net oftaxes — — — (2,386) (1,317)Net income $7,016 $19,758 $27,558 $38,449 $58,812Basic weighted-average sharesoutstanding 35,925 36,838 38,795 40,568 40,599Diluted weighted-average sharesoutstanding 36,026 36,970 38,861 40,632 40,648Net income (loss) per share - basic Continuing operations $0.20 $0.54 $0.71 $1.01 $1.48Discontinued operations — — — (0.06) (0.03)Net income per share $0.20 $0.54 $0.71 $0.95 $1.45Net income (loss) per share - diluted Continuing operations $0.19 $0.53 $0.71 $1.00 $1.48Discontinued operations — — — (0.06) (0.03)Net income per share $0.19 $0.53 $0.71 $0.95 $1.45Net Revenues by Segment (2): Direct $351,786 $355,175 $351,286 $335,602 $321,092Indirect 102,862 130,762 151,312 173,388 209,804Total $454,648 $485,937 $502,598 $508,990 $530,896Store Data (3): Total stores open at end of year 160 159 150 125 99Comparable sales (including e-commerce)decrease (4) (6.7)% (7.0)% (10.6)% (7.6)% (1.3)%Total gross square footage at end of year 377,861 368,640 342,362 278,779 207,096Average net revenues per gross squarefoot (5) $640 $642 $703 $760 $887 32Table of Contents As of($ in thousands) February 3, 2018 January 28, 2017 January 30, 2016 January 31, 2015 February 1, 2014Consolidated Balance Sheet Data: Cash and cash equivalents $68,751 $86,375 $97,681 $112,292 $59,215Short-term investments 54,150 30,152 — — —Working capital 201,749 193,070 187,090 204,648 193,511Long-term investments 15,515 — — — —Total assets 350,669 373,509 380,679 377,284 334,383Shareholders’ equity 285,283 283,786 285,255 284,471 255,147(1)The Company utilizes a 52-53 week fiscal year. Fiscal year 2018 consisted of 53 weeks. Fiscal years 2017, 2016, 2015, and 2014 consisted of 52weeks. The extra week contributed approximately $4.1 million in net revenues and added an estimated $0.01 to diluted net income per share in fiscal2018. By segment, the extra week contributed net revenues of approximately $3.0 million to Direct and $1.1 million to Indirect.(2)Includes restructuring and other charges described further in Note 13 to the Notes to the Consolidated Financial Statements herein. Financial datarecasts Japan results of operations as discontinued operations for all years presented. Japan results of operations were formerly included in the Directsegment results.(3)Includes full-line and factory outlet stores.(4)Comparable sales are calculated based upon our stores that have been open for at least 12 full fiscal months and net revenues from our e-commerceoperations. Decrease is reported as a percentage of the comparable sales for the same period in the prior fiscal year. Remodeled stores are included incomparable sales unless the store was closed for a portion of the current or comparable prior period, in which case the non-comparable temporaryclosure periods are not included, or the remodel resulted in a significant change in square footage. Calculation excludes sales for the 53rd week infiscal 2018.(5)Dollars not in thousands. Average net revenues per gross square foot are calculated by dividing total net revenues for our stores that have been openat least 12 full fiscal months as of the end of the period by total gross square footage for those stores. Remodeled stores are included in average netrevenues per gross square foot unless the store was closed for a portion of the period. Calculation excludes sales for the 53rd week in fiscal 2018.(6)Impairment charges, related to underperforming stores, totaled $6.3 million, $12.7 million, $2.8 million, $0.4 million, and $1.2 million during thefiscal years ended February 3, 2018, January 28, 2017, January 30, 2016, January 31, 2015, and February 1, 2014, respectively.(7)Fiscal 2018 includes a $2.1 million net charge as a result of the Tax Cuts and Jobs Act. Refer to Note 5 to the Notes to the Consolidated FinancialStatements herein for additional information.33Table of ContentsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsYou should read the following discussion in conjunction with the consolidated financial statements and accompanying notes and the informationcontained in other sections of this report, particularly under the headings “Risk Factors,” “Selected Financial Data” and “Business.” This discussion andanalysis is based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Thestatements in this discussion and analysis concerning expectations regarding our future performance, liquidity, and capital resources, as well as other non-historical statements in this discussion and analysis, are forward-looking statements. See “Forward-Looking Statements.” These forward-looking statementsare subject to numerous risks and uncertainties, including those described under “Risk Factors.” Our actual results could differ materially from thosesuggested or implied by any forward-looking statements.Executive SummaryAs more fully described herein, we began the implementation of our Vision 20/20 strategic plan, including product and pricing initiatives and SG&Aexpense reduction initiatives, in the third quarter of fiscal 2018, as well as achieved strategic product, distribution, and marketing initiatives.Strategic Progress•We made progress on our Vision 20/20 product and pricing initiatives by implementing an online outlet site to reduce clearance sales fromverabradley.com and our SG&A expense reduction initiatives by right-sizing our corporate and retail store infrastructure to align with the size ofthe business, including closing five underperforming full-line stores and one underperforming factory outlet store.•We made progress in the product area, including:•Continuing to reinvigorate and reinvent our cotton assortment, including the introduction of our Iconic cotton collection which featuresmicro-quilting, added functionality and innovation, and several updated silhouettes and•Expanding our licensing program by launching products in the technology, swimwear, bedding, stationery, hosiery, and medical uniformscategories.•We made progress in the distribution area, including:•Launching our new platform for verabradley.com in February 2017, creating a dynamic digital flagship. The new site offers a number ofenhancements including, among other things, the ability to strategically segment and personalize messaging, express check-out, “order on-line, pick up in store,” and the addition of the GiftNow feature, which allows customers to purchase gifts from verabradley.com that can bemodified by the recipient before shipment;•Opening six factory outlet stores and one full-line pop-up store; and•Completing store renovations on 20 of our continuing full-line stores to reflect our new design aesthetic by updating the storefront facade,brand logo, and interior.•In the marketing area, we increased brand awareness through our “digital first” strategy by partnering with key influencers and leveraging socialmedia channels.Financial SummaryFiscal 2018 was a 53-week period compared to fiscal 2017 which was a 52-week period.•Net revenues decreased 6.4% to $454.6 million in fiscal 2018 compared to $485.9 million in fiscal 2017. The extra week in fiscal 2018 addedapproximately $4.1 million to net revenues.•Direct segment sales decreased 1.0% to $351.8 million in fiscal 2018 compared to $355.2 million in fiscal 2017. The extra week in fiscal2018 added approximately $3.0 million to net revenues. Comparable sales for fiscal 2018 decreased 6.7%.•Indirect segment sales decreased 21.3% to $102.9 million in fiscal 2018 compared to $130.8 million in fiscal 2017. The extra week in fiscal2018 added approximately $1.1 million to net revenues.•Gross profit was $254.0 million (55.9% of net revenue) in fiscal 2018 compared to $276.0 million (56.8% of net revenue) in fiscal 2017.•Selling, general, and administrative expenses were $239.8 million (52.7% of net revenue) in fiscal 2018 compared to $249.2 million (51.3% of netrevenue) in fiscal 2017.34Table of Contents•Operating income was $15.0 million (3.3% of net revenue) in fiscal 2018 compared to $28.2 million (5.8% of net revenue) in fiscal 2017.•Net income was $7.0 million in fiscal 2018 compared to $19.8 million in fiscal 2017.•Diluted net income per share decreased 64.2% to $0.19 in fiscal 2018 from $0.53 in fiscal 2017. The extra week in fiscal 2018 added an estimated$0.01 to diluted net income per share.•Vision 20/20-related charges and other charges (including store impairment charges) were $19.5 million ($12.3 million after the associated taxbenefit) in fiscal 2018 compared to other charges (including store impairment charges) of $13.6 million ($8.6 million after the associated taxbenefit) in fiscal 2017.•Income tax expense was negatively impacted by a $2.1 million net charge related to the Tax Cuts and Jobs Act (“Tax Act”) and benefited by $1.6million related to the release of certain income tax reserves for fiscal 2018 and fiscal 2017, respectively.•Cash, cash equivalents, and investments were $138.4 million at February 3, 2018 compared to $116.5 million at January 28, 2017.•Capital expenditures for fiscal 2018 totaled $11.8 million compared to $20.8 million for fiscal 2017.•Repurchases of common stock for fiscal 2018 totaled $7.9 million, or 0.9 million shares, compared to $24.5 million, or 1.6 million shares, in fiscal2017.How We Assess the Performance of Our BusinessIn assessing the performance of our business, we consider a variety of performance and financial measures.Net RevenuesNet revenues reflect revenues from the sale of our merchandise and from distribution and shipping and handling fees, less returns and discounts. Revenues forthe Direct segment reflect sales through our full-line and factory outlet stores, verabradley.com, our online outlet site, direct-to-consumer eBay sales, and ourannual outlet sale in Fort Wayne, Indiana. Revenues for the Indirect segment reflect sales to approximately 2,400 specialty retail partners, department stores,national accounts, third party e-commerce sites, third-party inventory liquidators, and sales generated through licensing agreements.Comparable SalesComparable sales are calculated based upon our stores that have been open for at least 12 full fiscal months and net revenues from our e-commerceoperations. Comparable store sales are calculated based solely upon our stores that have been open for at least 12 full fiscal months. Remodeled stores areincluded in comparable sales and comparable store sales unless the store was closed for a portion of the current or comparable prior period, in which case thenon-comparable temporary closure periods are not included, or the remodel resulted in a significant change in square footage. Some of our competitors andother retailers calculate comparable or “same store” sales differently than we do. As a result, data in this report regarding our comparable sales andcomparable store sales may not be comparable to similar data made available by other companies. Non-comparable sales include sales from stores notincluded in comparable sales or comparable store sales. The 53rd week in fiscal 2018 is excluded from comparable sales and comparable store sales.Measuring the change in year-over-year comparable sales allows us to evaluate how our store base and e-commerce operations are performing. Various factorsaffect our comparable sales, including:•Overall economic trends;•Consumer preferences and fashion trends;•Competition;•Timing of our releases of new patterns and collections;•Changes in our product mix;•Pricing and level of promotions;•Amount of store and mall traffic;•Level of customer service that we provide in stores;•Our ability to source and distribute products efficiently;•Number of stores we open and close in any period; and35Table of Contents•Timing and success of promotional and advertising efforts.In recent years, comparable store sales have declined. Consequently, the rate in which we have opened new stores has slowed and we do not currently haveany new full-line stores planned to be opened during fiscal 2019. As part of our Vision 20/20 initiatives, we are forecasting to close up to an additional 45full-line stores by the end of fiscal 2021. During fiscal 2018, we closed five underperforming full-line stores and one underperforming factory outlet store. Weplan to open six new factory outlet stores during fiscal 2019 and will continue to evaluate our plans for store openings in future years in light of demand andstore performance.Gross ProfitGross profit is equal to our net revenues less our cost of sales. Cost of sales includes the direct cost of purchased 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 retailand wholesale companies.Gross profit can be impacted by changes in volume; fluctuations in sales price; operational efficiencies, such as leveraging of fixed costs; promotionalactivities, such as free shipping; commodity prices, such as cotton prices; and labor costs.Selling, General, and Administrative Expenses (SG&A)SG&A expenses include selling; advertising, marketing, and product development; and administrative. Selling expenses include Direct business expensessuch as store expenses, employee compensation, and store occupancy and supply costs, as well as Indirect business expenses consisting primarily ofemployee compensation and other expenses associated with sales to Indirect retailers. Advertising, marketing, and product development expenses includeemployee compensation, media costs, creative production expenses, marketing agency fees, new product design costs, public relations expenses, and marketresearch expenses. A portion of our advertising expenses may be reimbursed by Indirect retailers, and such amount is classified as other income.Administrative expenses include employee compensation for corporate functions, corporate headquarters occupancy costs, consulting and software expenses,and charitable donations.Impairment charges are included in SG&A expenses and totaled $6.3 million, $12.7 million, and $2.8 million for the fiscal years ended February 3, 2018,January 28, 2017, and January 30, 2016, respectively.Other IncomeWe support many of our Indirect retailers’ marketing efforts by distributing certain catalogs and promotional mailers to current and prospective customers.Our Indirect retailers reimburse us for a portion of the cost to produce these materials. Reimbursement received is recorded as other income. The related costto design, produce, and distribute the catalogs and mailers is recorded as SG&A expense. Other income also includes proceeds from the sales of tickets to ourannual outlet sale.Operating IncomeOperating income is equal to gross profit less SG&A expenses plus other income. Operating income excludes interest income, interest expense, and incometaxes.Income Before Income TaxesIncome before income taxes is equal to operating income plus interest income less interest expense.Net IncomeNet income is equal to income before income taxes less income tax expense.36Table of ContentsResults of OperationsThe following tables summarize key components of our consolidated results of operations for the last three fiscal years, both in dollars and as a percentage ofour net revenues. Fiscal Year Ended (1)($ in thousands) February 3, 2018 January 28, 2017 January 30, 2016Statement of Income Data: Net revenues $454,648 $485,937 $502,598Cost of sales 200,639 209,891 221,409Gross profit 254,009 276,046 281,189Selling, general, and administrative expenses (5) 239,810 249,155 236,836Other income 782 1,329 2,369Operating income 14,981 28,220 46,722Interest (income) expense, net (413) 178 263Income before income taxes 15,394 28,042 46,459Income tax expense (6) 8,378 8,284 18,901Net income (7) $7,016 $19,758 $27,558Percentage of Net Revenues: Net revenues 100.0 % 100.0% 100.0%Cost of sales 44.1 % 43.2% 44.1%Gross profit 55.9 % 56.8% 55.9%Selling, general, and administrative expenses 52.7 % 51.3% 47.1%Other income 0.2 % 0.3% 0.5%Operating income 3.3 % 5.8% 9.3%Interest (income) expense, net (0.1)% —% 0.1%Income before income taxes 3.4 % 5.8% 9.2%Income tax expense 1.8 % 1.7% 3.8%Net income 1.5 % 4.1% 5.5%The following tables present net revenues by operating segment, both in dollars and as a percentage of our net revenues, and full-line and factory outlet storedata for the last three fiscal years: Fiscal Year Ended (1)($ in thousands, except as otherwise indicated) February 3, 2018 January 28, 2017 January 30, 2016Net Revenues by Segment: Direct $351,786 $355,175 $351,286Indirect 102,862 130,762 151,312Total $454,648 $485,937 $502,598Percentage of Net Revenues by Segment: Direct 77.4% 73.1% 69.9%Indirect 22.6% 26.9% 30.1%Total 100.0% 100.0% 100.0%37Table of Contents Fiscal Year Ended February 3, 2018 January 28, 2017 January 30, 2016Store Data (2): Total stores opened during period 7 10 26Total stores closed during period (6) (1) (1)Total stores open at end of period 160 159 150Comparable sales (including e-commerce) decrease (3) (6.7)% (7.0)% (10.6)%Total gross square footage at end of period 377,861 368,640 342,362Average net revenues per gross square foot (4) $640 $642 $703 (1)The Company utilizes a 52-53 week fiscal year ending on the Saturday closest to January 31. Fiscal year 2018 consisted of 53 weeks. Fiscal years2017 and 2016 consisted of 52 weeks. The extra week contributed approximately $4.1 million in net revenues and added an estimated $0.01 todiluted net income per share in fiscal 2018. By segment, the extra week contributed net revenues of approximately $3.0 million to Direct and $1.1million to Indirect.(2)Includes full-line and factory outlet stores.(3)Comparable sales are calculated based upon our stores that have been open for at least 12 full fiscal months and net revenues from our e-commerceoperations. Decrease is reported as a percentage of the comparable sales for the same period in the prior fiscal year. Remodeled stores are included incomparable sales unless the store was closed for a portion of the current or comparable prior period, in which case the non-comparable temporaryclosure periods are not included, or the remodel resulted in a significant change in square footage. Calculation excludes sales for the 53rd week infiscal 2018.(4)Dollars not in thousands. Average net revenues per gross square foot are calculated by dividing total net revenues for our stores that have been openat least 12 full fiscal months as of the end of the period by total gross square footage for those stores. Remodeled stores are included in average netrevenues per gross square foot unless the store was closed for a portion of the period. Calculation excludes sales for the 53rd week in fiscal 2018.(5)Impairment charges, related to underperforming stores, totaled $6.3 million, $12.7 million, and $2.8 million, during the fiscal years ended February 3,2018, January 28, 2017, and January 30, 2016, respectively.(6)Fiscal 2018 includes a $2.1 million net charge as a result of the Tax Act. Refer to Note 5 to the Notes to the Consolidated Financial Statements hereinfor additional information.(7)Refer to Note 13 to the Notes to the Consolidated Financial Statement herein for restructuring and other charges affecting the comparability of results.Payment Card IncidentDescription of EventOn September 15, 2016, we received information from law enforcement regarding a potential data security issue related to our retail store network. Findingsfrom the investigation showed unauthorized access to our payment processing system and the installation of a program that looked for payment card data.The program was specifically designed to find track data in the magnetic stripe of a payment card that may contain the card number, cardholder name,expiration date, and internal verification code as the data was being routed through the affected payment systems. There is no indication that other customerinformation was at risk. Payment cards used at Vera Bradley store locations between July 25, 2016 and September 23, 2016 may have been affected. Not allcards used in stores during this time frame were affected. Cards used on verabradley.com were not affected.We have resolved this incident and continue to work with a computer security firm to further strengthen the security of our system to help prevent events ofthis nature from happening in the future. We continue to support law enforcement’s investigation and also promptly notified the payment card networks sothat the banks that issue payment cards could initiate heightened monitoring on the affected cards. Claims have been received by some, not all, of thepayment card networks for this incident which is expected to be covered by our insurance, as described below.Expenses Incurred and Amounts AccruedDuring the fiscal years ended February 3, 2018 and January 28, 2017, we recorded an immaterial amount of expense relating to the Payment Card Incident.Expenses included remediation activities during fiscal 2018 and costs to investigate the Payment Card Incident and obtain legal and other professionalservices during fiscal 2017. There was no incremental expense associated with the claims received in fiscal 2018 as they are expected to be reimbursable andprobable of recovery under our insurance coverage. The insurance deductible was accrued during fiscal 2017.38Table of ContentsFuture CostsAdditional payment card companies and associations may require us to reimburse them for unauthorized card charges and costs to replace cards and may alsoimpose fines or penalties in connection with the Payment Card Incident, and enforcement authorities may also impose fines or other remedies against us. Atthis time, we cannot reasonably estimate the potential loss or range of loss related to the additional fines or penalties that may be assessed, if any. ThePayment Card Incident, including customer response and any possible third party claims or the additional assessments from payment card companies, couldmaterially adversely affect our financial condition and operating results. However, we expect our insurance coverage will offset most of the expenses for theinvestigation and other legal and professional services associated with the incident, possible third party claims, as well as fines, penalties, or other expenses,if any additional, imposed by payment card companies, as discussed above.Insurance CoverageWe maintain $15.0 million of cyber security insurance coverage above a $0.1 million deductible.Vision 20/20 InitiativesFifty-Three Weeks Ended February 3, 2018During fiscal 2018, we launched our Vision 20/20 strategic plan, which involves a more aggressive approach to turn around our business over the next threeyears. This plan is primarily focused on product and pricing initiatives, as well as selling, general, and administrative expense reduction initiatives.The product and pricing initiatives include restoring our full-price business by significantly reducing the amount of clearance merchandise offered onverabradley.com and in our full-line stores, streamlining current product offerings by eliminating unproductive or incongruent categories and SKUs from ourassortment, and introducing tighter guardrails around new categories, patterns, and pricing. We expect fiscal 2019 revenues will be negatively impacted bythese initiatives by $30.0 million to $50.0 million from fiscal 2018 levels.We continue to reduce selling, general, and administrative expenses by right-sizing the corporate infrastructure to better align with the size of the business,lowering our marketing spending by focusing on efficiencies while keeping our most loyal customers engaged, and taking a more aggressive stance onreducing store operating costs and closing underperforming full-line stores. We expect to reduce annual selling, general, and administrative expenses by upto $30.0 million (off of our fiscal 2017 base level and excluding severance, store impairment, and Vision 20/20 charges from all periods). We expect that$20.0 million to $25.0 million of the annualized selling, general, and administrative expense reductions will be made by the end of fiscal 2019. We areforecasting to close up to 45 additional full-line stores by the end of fiscal 2021, primarily as leases expire.The implementation of the plan began in the third quarter of fiscal 2018, but the majority of the product and pricing initiatives will not be completed untilfiscal 2019.We have incurred the following Vision 20/20-related charges during the fiscal year ended February 3, 2018 (in thousands): Fiscal 2018 Statements of Income Line Item Total Expense Reportable Segment UnallocatedCorporateExpensesSG&A Cost of Sales Direct Indirect Asset impairment charges (1)$6,298 $— $6,298 $6,298 $— $—Strategic consulting charges (2)4,649 — 4,649 — — 4,649Severance charges3,867 199 4,066 826 1,184 2,056Inventory-related charges (3)— 935 935 — 935 —Other charges (4)751 — 751 466 230 55Total$15,565 $1,134 $16,699(5) $7,590 $2,349 $6,760(1) Refer to Note 3 to the Notes to the Consolidated Financial Statements herein for additional details(2) Consulting charges for the identification and implementation of Vision 20/20 initiatives(3) Inventory adjustments for the discontinuation of certain inventory categories(4) Includes a net lease termination charge and accelerated depreciation charges(5) After the associated tax benefit, the charges totaled $10.6 million39Table of ContentsOther Charges Affecting Comparability of the Fifty-Three Weeks Ended February 3, 2018, Fifty-Two Weeks Ended January 28, 2017, and Fifty-TwoWeeks Ended January 30, 2016Fifty-Three Weeks Ended February 3, 2018Other charges recognized in selling, general, and administrative expenses during fiscal 2018, before the implementation of Vision 20/20, totaled $2.8 million($1.7 million after the associated tax benefit). These pre-tax charges consisted of $2.5 million in severance charges (recognized within corporate unallocatedexpenses) and $0.3 million for a net lease termination charge (recognized within the Direct segment).Other charges recognized in tax expense during fiscal 2018 totaled $2.1 million related to the Tax Act further described below.Fifty-Two Weeks Ended January 28, 2017Other charges recognized in selling, general, and administrative expenses during fiscal 2017 totaled $13.6 million ($8.6 million after the associated taxbenefit) and consisted of store impairment charges of $12.7 million (recognized within the Direct segment) and a severance charge of $0.9 million(recognized within corporate unallocated expenses). Refer to Note 3 to the Notes to the Consolidated Financial Statements herein for additional detailsregarding the store impairment charges. Fiscal 2017 also included a $1.6 million tax benefit (reflected in income tax expense) related to the release of certainincome tax reserves.Fifty-Two Weeks Ended January 30, 2016In the first quarter of fiscal 2016, we closed our manufacturing facility located in New Haven, Indiana. We incurred restructuring and other charges during thefirst quarter of fiscal 2016 of approximately $3.4 million ($2.1 million after the associated tax benefit), related to the facility closing. These pre-tax chargesincluded:•Severance and benefit costs of approximately $1.7 million;•Lease termination costs of approximately $0.7 million;•Inventory-related charges of approximately $0.6 million; and•Other associated net costs, which include accelerated depreciation related to fixed assets, of approximately $0.4 million.These charges are reflected in cost of sales in our Consolidated Financial Statements ($2.3 million was recognized within the Direct segment and $1.1 millionwas recognized within the Indirect segment). All production from the facility was absorbed by our third-party manufacturing suppliers.Additional charges, incurred in the first quarter of fiscal 2016, totaled approximately $5.3 million ($3.3 million after the associated tax benefit). These pre-taxcharges included:•$2.8 million for store impairment charges (recognized within the Direct segment; refer to Note 3 to the Notes to the Consolidated FinancialStatements herein for additional details);•$1.3 million for a severance charge (recognized within corporate unallocated expenses); and•$1.2 million due to a retail store early lease termination agreement (recognized within the Direct segment).The first quarter of fiscal 2016 also included a $0.6 million tax expense (reflected in income tax expense) related to an increase in income tax reserves foruncertain federal and state tax positions related to research and development tax credits.Tax ActOn December 22, 2017, the Tax Act was signed into law. The Tax Act includes, among other things, a corporate tax rate decrease from 35% to 21% effectivefor tax years beginning after December 31, 2017, bonus depreciation that will allow for full expensing for qualified property, the transition of U.S.international taxation from a worldwide system to a territorial system with a new provision designed to tax global intangible low-taxed income (“GILTI”),and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings. As a result of the enactment of the Tax Act, we recorded$2.1 million in provisional income tax expense during the fourth quarter of fiscal 2018 based upon our understanding of the Tax Act and guidance as of thedate of this filing. Any resulting changes to the provisional estimates and amounts not yet estimated will be recognized as an adjustment to tax expense inthe reporting period that the amounts are determined. Refer to Note 5 to the Notes to the Consolidated Financial Statements herein for additional informationregarding the Tax Act.40Table of ContentsImpairment ChargesProperty, plant, and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets maynot be recoverable. The reviews are conducted at the lowest identifiable level of cash flows. If the estimated undiscounted future cash flows related to theproperty, plant, and equipment are less than the carrying value, we recognize a loss equal to the difference between the carrying value and the fair value, asfurther defined in Note 2 to the Notes to the Consolidated Financial Statements herein. Impairment charges of $6.3 million, $12.7 million, and $2.8 millionwere recognized in the fiscal years ended February 3, 2018, January 28, 2017, and January 30, 2016, respectively, for assets related to underperforming storesand are included in selling, general, and administrative expenses in the Consolidated Statements of Income and in impairment charges in the ConsolidatedStatements of Cash Flows. The impairment charges are included in the Direct segment.Fiscal 2018 Compared to Fiscal 2017Net RevenuesFor fiscal 2018, net revenues decreased $31.3 million, or 6.4%, to $454.6 million, from $485.9 million for fiscal 2017. Fiscal 2018 includes approximately$4.1 million of net revenues related to the 53rd week.Direct. For fiscal 2018, net revenues decreased $3.4 million, or 1.0%, to $351.8 million, from $355.2 million for fiscal 2017. This change resulted fromapproximately $3.0 million of net revenues generated from the 53rd week in fiscal 2018 and a $17.8 million contribution of revenue from our non-comparable stores, which included seven additional stores in the current year, more than offset by a comparable sales decrease of $23.1 million, or 6.7%. Thedecrease in comparable sales includes a 9.3% decrease in e-commerce sales and a 5.5% decrease in comparable store sales. The decline in comparable saleswas primarily due to year-over-year declines in store and e-commerce traffic. The aggregate number of full-line and factory outlet stores grew from 159 at theend of fiscal 2017 to 160 at the end of fiscal 2018, which excludes six stores closed during fiscal 2018.Indirect. For fiscal 2018, net revenues decreased $27.9 million, or 21.3%, to $102.9 million, from $130.8 million for fiscal 2017, primarily due to a decline inorders from the Company's specialty retail accounts and certain key accounts along with a reduction in the number of specialty retail accounts. This declinewas partially offset by approximately $1.1 million of net revenues generated from the 53rd week in fiscal 2018.Gross ProfitFor fiscal 2018, gross profit decreased $22.0 million, or 8.0%, to $254.0 million, from $276.0 million for fiscal 2017. As a percentage of net revenues, grossprofit decreased to 55.9% for fiscal 2018, from 56.8% for fiscal 2017. The decrease as a percentage of net revenues was primarily due to increasedpromotional activity in our factory outlet stores, inventory adjustments taken against certain product categories in the second and third quarters of the currentyear, and channel mix changes, partially offset by a reduction in product cost.Selling, General and Administrative Expenses (SG&A)For fiscal 2018, SG&A expenses decreased $9.4 million, or 3.8%, to $239.8 million, from $249.2 million for fiscal 2017. As a percentage of net revenues,SG&A expenses were 52.7% and 51.3% for fiscal 2018 and fiscal 2017, respectively. The current-year period included $18.4 million of Vision 20/20 andother charges, which consisted of $6.4 million of employee severance charges; $6.3 million of store impairment charges; $4.6 million of strategic consultingcharges; and $1.1 million for net lease termination charges and other Vision 20/20 charges. The prior-year period included $13.6 million of other itemsconsisting of $12.7 million of store impairment charges and $0.9 million for an executive severance charge. The $4.8 million increase in SG&A expenses forfiscal 2018, as a result of the aforementioned charges, was more than offset by a $14.2 million decrease in SG&A expenses for fiscal 2018. The decrease inSG&A expenses was primarily due to a reduction in both employee-related expenses and advertising expenses, partially offset by new store expenses,including expenses associated with stores opened during fiscal 2018 and incremental expenses associated with the annualization of stores opened duringfiscal 2017. SG&A expenses as a percentage of net revenues increased primarily due to SG&A expense deleverage associated with lower sales, new storeexpenses, and the aggregate incremental impact of the fiscal 2018 Vision 20/20 charges and other charges, partially offset by the impact of theaforementioned incremental expense savings.Other IncomeFor fiscal 2018, other income decreased $0.5 million, or 41.2%, to $0.8 million, from $1.3 million for fiscal 2017, primarily due to a decrease in participationin the co-op mailer program.41Table of ContentsOperating IncomeFor fiscal 2018, operating income decreased $13.2 million, or 46.9%, to $15.0 million from $28.2 million for fiscal 2017. As a percentage of net revenues,operating income was 3.3% and 5.8% for fiscal 2018 and fiscal 2017, respectively. Operating income decreased due to the factors described above.The following table provides additional information about our operating income (in thousands). Fiscal Year Ended $Change %Change February 3, 2018 January 28, 2017 Operating Income: Direct $60,979 $62,577 $(1,598) (2.6)%Indirect 34,763 50,955 (16,192) (31.8)%Less: Unallocated corporate expenses (80,761) (85,312) 4,551 (5.3)%Operating income $14,981 $28,220 $(13,239) (46.9)%Direct. For fiscal 2018, operating income decreased $1.6 million, or 2.6%. As a percentage of Direct segment net revenues, operating income in the Directsegment was 17.3% and 17.6% for fiscal 2018 and 2017, respectively. The decrease in operating income as a percentage of Direct segment net revenues wasprimarily due to new store expenses, a decline in the gross profit as a percentage of net revenues as described above, and deleverage of SG&A expenses due tolower sales, partially offset by lower store impairment charges and employee-related expenses as compared to the prior-year period.Indirect. For fiscal 2018, operating income decreased $16.2 million, or 31.8%. As a percentage of Indirect segment net revenues, operating income in theIndirect segment was 33.8% and 39.0% for fiscal 2018 and 2017, respectively. The decrease in operating income as a percentage of Indirect segment netrevenues was primarily due to deleverage of selling, general, and administrative expenses as a result of lower sales and a decrease in gross profit as apercentage of net revenues, as described above.Corporate Unallocated. For fiscal 2018, unallocated expenses decreased $4.6 million, or 5.3%. The decrease in unallocated expenses was primarily due to adecrease in advertising spending and employee-related expenses principally as a result of expense management, which was associated in part with theimplementation of Vision 20/20 initiatives during the third quarter. These savings were partially offset by Vision 20/20 and other charges of $9.3 million inthe current-year period which consisted of $4.6 million of strategic consulting charges, $4.6 million of employee severance charges, and $0.1 million of otherVision 20/20 charges. The prior-year period included $0.9 million for an executive severance charge.Interest (Income) Expense, Net. For fiscal 2018, net interest (income) expense increased $0.6 million, or 332.0%, to $(0.4) million, from $0.2 million in fiscal2017. The year-over-year increase was primarily a result of interest earned on our investment portfolio which was implemented during fiscal 2018. Refer toNote 14 to the Notes to the Consolidated Financial Statements herein for additional information regarding our investments.Income Tax Expense. For fiscal 2018, we recorded income tax expense of $8.4 million at an effective tax rate of 54.4%, compared to 29.5% for fiscal 2017.The year-over-year increase in the effective tax rate was primarily due to the relative impact of $2.1 million of net charges associated with the Tax Actenacted during the fourth quarter of fiscal 2018 along with the relative impact of permanent and discrete items, including a tax shortfall from stock-basedcompensation. Refer to Note 5 to the Notes to the Consolidated Financial Statements herein for additional information regarding the Tax Act. The prior-yearperiod included a $1.6 million income tax benefit for the release of certain income tax reserves.42Table of ContentsNet IncomeFor fiscal 2018, net income decreased $12.8 million, or 64.5%, to $7.0 million from $19.8 million in fiscal 2017. The current-year period included $19.5million ($12.3 million after the associated tax benefit) of Vision 20/20-related charges (including store impairment charges) and other charges and $2.1million of tax expense associated with the enactment of the Tax Act, as described further in Note 5 to the Notes to the Consolidated Financial Statementsherein. The comparable prior-year period included other charges (including store impairment charges) of $13.6 million ($8.6 million after the associated taxbenefit), partially offset by a $1.6 million income tax benefit related to the release of certain income tax reserves.Fiscal 2017 Compared to Fiscal 2016Net RevenuesFor fiscal 2017, net revenues decreased $16.7 million, or 3.3%, to $485.9 million, from $502.6 million for fiscal 2016.Direct. For fiscal 2017, net revenues increased $3.9 million, or 1.1%, to $355.2 million, from $351.3 million for fiscal 2016. This change resulted from a$28.0 million contribution of revenue from our non-comparable stores, which included ten additional stores in fiscal 2017, partially offset by a comparablesales decrease of $23.7 million, or 7.0%. The decrease in comparable sales includes a 6.7% decrease in e-commerce sales and a 7.1% decrease in comparablestore sales. The decline in comparable sales was primarily due to year-over-year declines in store and e-commerce traffic, as well as lower levels ofpromotional activity in the first quarter of fiscal 2017. The aggregate number of full-line and factory outlet stores grew from 150 at the end of fiscal 2016 to159 at the end of fiscal 2017, which excludes one store closed at the end of the fourth quarter of fiscal 2017.Indirect. For fiscal 2017, net revenues decreased $20.5 million, or 13.6%, to $130.8 million, from $151.3 million for fiscal 2016, primarily due to lowerorders from specialty retail accounts.Gross ProfitFor fiscal 2017, gross profit decreased $5.2 million, or 1.8%, to $276.0 million, from $281.2 million for fiscal 2016. As a percentage of net revenues, grossprofit increased to 56.8% for fiscal 2017, from 55.9% for fiscal 2016. The increase as a percentage of net revenues was primarily due to sourcing efficiencies(partly due to reduced overhead costs resulting from the closing of our domestic manufacturing facility), partially offset by increased promotional activity atour factory outlet stores. In addition, gross profit in the first quarter of the comparable prior-year period was impacted by restructuring charges of $3.4 millionrelated to the closure of our manufacturing facility in the first quarter of fiscal 2016, as discussed in more detail in Note 13 to the Notes to the ConsolidatedFinancial Statements herein.Selling, General and Administrative Expenses (SG&A)For fiscal 2017, SG&A expenses increased $12.4 million, or 5.2%, to $249.2 million, from $236.8 million for fiscal 2016. As a percentage of net revenues,SG&A expenses were 51.3% and 47.1% for fiscal 2017 and fiscal 2016, respectively. The increase in SG&A expenses for fiscal 2017 was primarily due to$10.0 million in incremental store impairment charges and $7.1 million in new store expenses in fiscal 2017, partially offset by a $2.7 million reduction inincentive compensation due to Company performance. In addition, the first quarter of the prior-year period included $1.2 million in expense related to aretail store early termination agreement which did not recur in fiscal 2017. SG&A expenses as a percentage of net revenues increased primarily due to theaforementioned items and fixed expenses being spread over lower comparable sales and deleveraging of store operating expenses as a result of lowercomparable store sales.Other IncomeFor fiscal 2017, other income decreased $1.1 million, or 43.9%, to $1.3 million, from $2.4 million for fiscal 2016, primarily due to a decrease in participationin the co-op mailer program.Operating IncomeFor fiscal 2017, operating income decreased $18.5 million, or 39.6%, to $28.2 million from $46.7 million for fiscal 2016. As a percentage of net revenues,operating income was 5.8% and 9.3% for fiscal 2017 and fiscal 2016, respectively. Operating income decreased due to the factors described above.43Table of ContentsThe following table provides additional information about our operating income (in thousands). Fiscal Year Ended $Change %Change January 28, 2017 January 30, 2016 Operating Income: Direct $62,577 $74,114 $(11,537) (15.6)%Indirect 50,955 60,409 (9,454) (15.6)%Less: Unallocated corporate expenses (85,312) (87,801) 2,489 (2.8)%Operating income $28,220 $46,722 $(18,502) (39.6)%Direct. For fiscal 2017, operating income decreased $11.5 million, or 15.6%. As a percentage of Direct segment net revenues, operating income in the Directsegment was 17.6% and 21.1% for fiscal 2017 and 2016, respectively. The decrease in operating income as a percentage of Direct segment net revenues wasprimarily due to $10.0 million in incremental store impairment charges, $7.1 million in new store expenses, and deleveraging of store operating expenses as aresult of lower comparable store sales, partially offset by $3.5 million in restructuring and other charges related to the closure of our manufacturing facilityand a retail store early termination agreement in the comparable prior-year period, as well as an increase in gross profit as a percentage of net revenues, asdescribed above.Indirect. For fiscal 2017, operating income decreased $9.5 million, or 15.6%. As a percentage of Indirect segment net revenues, operating income in theIndirect segment was 39.0% and 39.9% for fiscal 2017 and 2016, respectively. The decrease in operating income as a percentage of Indirect segment netrevenues was primarily due to lower sales, partially offset by an increase in gross profit as a percentage of net revenues, as described above, as well as $1.1million in restructuring charges related to the closure of our manufacturing facility in the comparable prior-year period.Corporate Unallocated. For fiscal 2017, unallocated expenses decreased $2.5 million, or 2.8%. The decrease in unallocated expenses was primarily due to adecrease in incentive compensation as a result of Company performance.Interest Expense, Net. For fiscal 2017, net interest expense decreased $0.1 million, or 32.3%, to $0.2 million, from $0.3 million in fiscal 2016.Income Tax Expense. For fiscal 2017, we recorded income tax expense of $8.3 million at an effective tax rate of 29.5%, compared to 40.7% for fiscal 2016.The year-over-year decrease in the effective tax rate was primarily due to the release of approximately $1.6 million of certain income tax reserves as a result ofthe conclusion of an IRS audit. The prior-year period included $0.6 million of income tax reserves for uncertain tax positions related to research anddevelopment tax credits.Net IncomeFor fiscal 2017, net income decreased $7.8 million, or 28.3%, to $19.8 million from $27.6 million in fiscal 2016. Fiscal 2017 included other charges(including store impairment charges) of $13.6 million ($8.6 million after the associated tax benefit), partially offset by a $1.6 million income tax benefitrelated to the release of certain income tax reserves. The comparable prior-year period included restructuring and other charges of $5.9 million ($3.6 millionafter the associated tax benefit), as described in Note 13 to the Notes to the Consolidated Financial Statements herein, and $2.8 million in store impairmentcharges ($1.8 million after the associated tax benefit). The prior-year period also included $0.6 million of income tax expense related to an increase inincome tax reserves for uncertain federal and state tax positions.Liquidity and Capital ResourcesGeneralOur primary sources of liquidity are cash on hand and cash equivalents, investments, and cash flow from operations. We also have access to additionalliquidity, if needed, through availability under our $125.0 million second amended and restated credit agreement. There were no borrowings under thisagreement during the fiscal year ended February 3, 2018, and there was no debt outstanding as of February 3, 2018. Historically, our primary cash needs havebeen for merchandise inventories; payroll; store rent; capital expenditures associated with operational equipment, buildings, information technology, andopening new stores; and share repurchases. The most significant components of our working capital are cash and cash equivalents, short-term investments,merchandise inventories, accounts receivable, accounts payable, and other current liabilities.44Table of ContentsWe believe that cash on hand and cash equivalents, cash flows from operating activities, investments, and the availability of borrowings under our secondamended and restated credit agreement or other financing arrangements will be sufficient to meet working capital requirements and anticipated capitalexpenditures, as well as share repurchases and debt payments, if any, for the foreseeable future.InvestmentsCash Equivalents. Investments classified as cash equivalents relate to highly-liquid investments with a maturity of three months or less from the date ofpurchase. As of February 3, 2018, these investments in our portfolio consisted of commercial paper, a money market fund, and municipal securities.Short-Term Investments. As of February 3, 2018, short-term investments consisted of a certificate of deposit, municipal securities, U.S. and non-U.S. corporatedebt securities, and commercial paper with a maturity within one year of the balance sheet date. As of January 28, 2017, short-term investments consisted of acertificate of deposit with an original maturity of one year and a one-time option to accelerate maturity to 31 days without penalty. The certificate of depositfrom fiscal 2017 matured during the first quarter of fiscal 2018.Long-Term Investments. As of February 3, 2018, long-term investments consisted of municipal securities, U.S. and non-U.S. corporate debt securities, and U.S.treasury securities with a maturity greater than one year from the balance sheet date.Refer to Note 14 to the Notes to the Consolidated Financial Statements herein for additional information regarding our investments.Cash Flow AnalysisA summary of operating, investing, and financing activities is shown in the following table (in thousands): Fiscal Year Ended February 3, 2018 January 28, 2017 January 30, 2016Net cash provided by operating activities $42,642 $65,186 $43,270Net cash used in investing activities (51,604) (50,770) (26,322)Net cash used in financing activities (8,649) (25,715) (31,531)Net Cash Provided by Operating ActivitiesNet cash provided by operating activities consists primarily of net income adjusted for non-cash items, including depreciation, amortization, impairmentcharges, deferred taxes, and stock-based compensation, the effect of changes in assets and liabilities, and tenant-improvement allowances received fromlandlords under our store leases.Net cash provided by operating activities was $42.6 million during fiscal 2018, as compared to $65.2 million during fiscal 2017. The decrease in cashprovided by operating activities was primarily a result of a decrease in net income of $12.8 million and a change in accounts payable which resulted in a useof cash of $18.2 million as compared to a source of cash of $9.0 million in the comparable prior-year period primarily as a result of a reduction in certaininventory categories along with timing of payments. These factors were partially offset by a change in income taxes which resulted in a use of cash of $0.9million as compared to a use of cash of $12.0 million in the comparable prior-year period and a change in inventories that resulted in a source of cash of$14.4 million as compared to a source of cash of $11.3 million in the comparable prior-year period. The inventory change was primarily due to a reduction incertain inventory categories. The income tax change was primarily a result of the timing of an $11.5 million federal income tax payment in the prior-yearperiod.Net income included cash payments of approximately $7.6 million as a result of Vision 20/20 initiatives in the current-year period. Refer to Note 13 to theNotes to the Consolidated Financial Statements herein for additional information.Net cash provided by operating activities was $65.2 million during fiscal 2017, as compared to $43.3 million during fiscal 2016. The increase in cashprovided by operating activities was primarily a result of the timing of inventory receipts in fiscal 2017, which resulted in a source of cash for fiscal 2017 of$11.3 million, as compared to an inventory build in the comparable prior-year period for made-for-outlet product, which resulted in a use of cash of $15.2million in the comparable prior-year period. In addition, accounts payable resulted in a source of cash for fiscal 2017 of $9.0 million, as compared to a use ofcash of $8.7 million in the comparable prior-year period, primarily due to the timing of inventory payments. These sources of cash were partially offset by achange in income taxes which resulted in a use of cash of $12.0 million in fiscal 2017 as compared to a source of cash of $12.5 million in the comparableprior-year period. The income tax change was primarily a result of the45Table of Contentstiming of an $11.5 million federal income tax payment in fiscal 2017, as well as incremental payments as a result of increased income at certain points in timeduring fiscal 2017.Net Cash Used in Investing ActivitiesInvesting activities consist primarily of short-term investments, long-term investments, and capital expenditures for growth related to new store openings,buildings, operational equipment, and information technology investments.Net cash used in investing activities was $51.6 million in fiscal 2018, compared to $50.8 million in fiscal 2017. There was a decrease of $9.0 million inspending for property, plant, and equipment in the current-year period primarily due to a $4.2 million reduction in information technology investmentspending and the construction of seven retail stores and 20 store remodels in the current-year period as compared to the construction of ten retail stores and14 store remodels in the comparable prior-year period. In addition, there was a net use of cash of $39.8 million as a result of investment activity in the current-year period compared to a use of cash of $30.0 million in the comparable prior-year period.Net cash used in investing activities was $50.8 million in fiscal 2017, compared to $26.3 million in fiscal 2016. The increase in cash used in investingactivities was due to a $30.0 million short-term investment in a certificate of deposit made in the first quarter of fiscal 2017, partially offset by a decrease inproperty, plant, and equipment spending compared to the prior-year period. The decrease in property, plant, and equipment spending was primarily a result often new stores opened in fiscal 2017 as compared to 26 stores in the comparable prior-year period, as well as spending for the campus consolidation in theprior-year period which did not recur in fiscal 2017, partially offset by an increase in information technology investments, including spending for our e-commerce platform upgrade.Capital expenditures for fiscal 2019 are expected to be approximately $10.0 million.Net Cash Used in Financing ActivitiesNet cash used in financing activities was $8.6 million in fiscal 2018 compared to $25.7 million in fiscal 2017. The decrease in cash used in financingactivities was primarily due to $7.9 million of cash purchases of our common stock under the 2015 Share Repurchase Plan in the current-year periodcompared to $25.0 million of cash purchases of our common stock under the 2015 Share Repurchase Plan in the prior-year period.Net cash used in financing activities was $25.7 million in fiscal 2017 compared to $31.5 million in fiscal 2016. The decrease in cash used in financingactivities was primarily due to $25.0 million of cash purchases of our common stock under the 2015 Share Repurchase Plan in fiscal 2017 compared to $30.9million of cash purchases of our common stock under the 2015 and 2014 Share Repurchase Plans in the prior-year period.Second Amended and Restated Credit AgreementOn July 15, 2015, Vera Bradley Designs, Inc. (“VBD”), a wholly-owned subsidiary of the Company, entered into a Second Amended and Restated CreditAgreement among VBD, the lenders from time to time party thereto, JPMorgan Chase Bank, National Association, as administrative agent, Wells Fargo Bank,National Association, as syndication agent, and KeyBank National Association, as documentation agent (the “Credit Agreement”), which amended andrestated our prior credit agreement. The Credit Agreement provides for certain credit facilities to VBD in an aggregate principal amount not to initiallyexceed $125.0 million, the proceeds of which may be used for general corporate purposes of VBD and its subsidiaries, including but not limited to VeraBradley International, LLC and Vera Bradley Sales, LLC (collectively, the “Named Subsidiaries”).Amounts outstanding under the Credit Agreement bear interest, at VBD's option, at a per annum rate equal to either (A) the Alternate Base Rate (“ABR”) plusthe Applicable Margin, where the ABR is the highest of (i) the prime rate, (ii) the federal funds rate plus 0.5%, and (iii) Adjusted LIBOR for a one-monthinterest period plus 1%, and the Applicable Margin is a percentage ranging from 0.00% to 0.70% depending upon the Company's leverage ratio or (B)Adjusted LIBOR plus the Applicable Margin, where Adjusted LIBOR means LIBOR, as adjusted for statutory reserve requirements for eurocurrencyliabilities, and Applicable Margin is a percentage ranging from 1.00% to 1.70% depending upon the Company's leverage ratio. Any loans made, or letters ofcredit issued, pursuant to the Credit Agreement mature on July 15, 2020. As of February 3, 2018, the Company had no borrowings and availability of $125.0million under the agreement.VBD's obligations under the Credit Agreement are guaranteed by the Company and the Named Subsidiaries. The obligations of VBD under the CreditAgreement are secured by first priority security interests in all of the respective assets of VBD, the Company, and the Named Subsidiaries and a pledge of theequity interests of VBD and the Named Subsidiaries.The Credit Agreement contains various restrictive covenants, including restrictions on the Company's ability to dispose of assets, make acquisitions orinvestments, incur debt or liens, make distributions to stockholders or repurchase outstanding46Table of Contentsstock, enter into related party transactions and make capital expenditures, other than upon satisfaction of the conditions set forth in the Credit Agreement.The Company is also required to comply with certain financial and non-financial covenants, including maintaining a maximum leverage ratio, a minimumratio of EBITDAR to the sum of interest expense plus rentals (as defined in the Credit Agreement), and a limit on capital expenditures. Upon an event ofdefault, which includes certain customary events such as, among other things, a failure to make required payments when due, a failure to comply withcovenants, certain bankruptcy and insolvency events, a material adverse change (as defined in the Credit Agreement), defaults under other materialindebtedness, and a change in control, the lenders may accelerate amounts outstanding, terminate the agreement and foreclose on all collateral.On October 20, 2017, VBD entered into Amendment No. 2 (the “Amendment”) to the Credit Agreement. The Amendment modifies the ratio requirements ofcertain financial covenants in the Credit Agreement including the maximum leverage ratio and the minimum ratio of EBITDAR to the sum of interestexpense plus rentals (as defined in the Credit Agreement). The Amendment also modifies certain restrictive covenants including the acquisition ofinvestments and the limit of investments in foreign subsidiaries. The Company was in compliance with these covenants as of February 3, 2018.Contractual ObligationsWe enter into long-term contractual obligations and commitments in the normal course of business, primarily non-cancellable operating leases. As ofFebruary 3, 2018, our contractual cash obligations over the next several periods are as follows: Payments Due by Period (4)($ in thousands) Total Less Than1 Year 1 - 3 Years 3 - 5 Years More Than5 YearsOperating leases (1) $203,577 $32,778 $62,561 $53,374 $54,864Purchase obligations (2) 37,435 37,435 — — —Deemed mandatory repatriation tax (3) 345 345 — — —Total $241,357 $70,558 $62,561 $53,374 $54,864 (1)Our store leases are generally ten years with varying renewal options. Our future operating lease obligations would change if we were to extend theseleases, terminate these leases early or if we were to enter into new operating leases. As part of our Vision 20/20 initiatives, we are forecasting to closeup to an additional 45 full-line stores by fiscal 2021. These potential closures are not reflected in the table until an agreement with the landlord hasbeen reached.(2)Purchase obligations consist primarily of inventory purchases.(3)The Company has elected to pay the U.S. federal tax on deemed mandatory repatriation, associated with the Tax Act, when its fiscal 2018 federalincome tax return is filed in fiscal 2019.(4)Due to the uncertainty with respect to the timing of future cash flows associated with our uncertain tax positions at February 3, 2018, we are unable tomake reasonably reliable estimates of the period of cash settlement with the respective taxing authorities. Therefore, $0.1 million of uncertain taxpositions have been excluded from the contractual obligations table above.Off-Balance Sheet ArrangementsWe do not have any off-balance sheet financing or unconsolidated special purpose entities.Critical Accounting Policies and EstimatesThe preparation of financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) requires management tomake estimates and assumptions that affect the reported amounts of our assets, liabilities, revenues, and expenses, as well as the disclosures relating tocontingent assets and liabilities at the date of the consolidated financial statements. We evaluate our accounting policies, estimates, and judgments on an on-going basis. We base our estimates and judgments on historical experience and various other factors that we believe to be reasonable under thecircumstances. Actual results may differ from these estimates under different assumptions and conditions.We evaluate the development and selection of our critical accounting policies and estimates and believe that the following policies and estimates involve ahigher degree of judgment or complexity and are most significant to reporting our results of operations and financial position, and are therefore discussed ascritical. The following critical accounting policies reflect the significant estimates and judgments used in the preparation of our consolidated financialstatements. With respect to critical accounting policies, even a relatively minor variance between actual and expected experience can potentially have amaterially favorable or unfavorable impact on subsequent results of operations. Our historical results for the periods presented in the47Table of Contentsconsolidated financial statements, however, have not been materially impacted by such variances. More information on all of our significant accountingpolicies can be found in Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements.Revenue RecognitionRevenue from the sale of our products is recognized upon customer receipt of the product when collection of the associated receivables is reasonably assured,persuasive evidence of an arrangement exists, the sales price is fixed and determinable, and ownership and risk of loss have been transferred to the customer,which, for e-commerce and most Indirect sales, reflects an estimate of shipments that customers have not yet received. The adjustment of these shipments isbased on actual delivery dates to the customer. Significant changes in shipping terms or delivery times could materially impact our revenues in a givenperiod.We reserve for projected merchandise returns based on historical experience and other assumptions that we believe to be reasonable. In the Direct business,returns are refunded by issuing the same payment tender of the original purchase and in the Indirect business the customer is issued a credit to its account toapply to outstanding invoices. Merchandise exchanges of the same product at the same price are not considered merchandise returns. Product returns areoften resalable through our annual outlet sale or other channels. Additionally, we reserve for customer allowances for certain Indirect retailers based uponvarious contract terms and other potential product credits granted to Indirect retailers. The balance of the reserve for returns, customer shipments not yetreceived, and retailer credits was $3.3 million and $6.2 million as of February 3, 2018, and January 28, 2017, respectively.We sell gift cards with no expiration dates to customers and do not charge administrative fees on unused gift cards. Gift cards that we issue are recorded as aliability until they are redeemed, at which point revenue is recognized. In addition, we recognize revenue on unredeemed gift cards when the likelihood ofthe gift card being redeemed is remote and there is no legal obligation to remit the value of unredeemed gift cards to the relevant jurisdictions. We determinethe gift card breakage rate based on historical redemption patterns. During each of the fiscal years ended February 3, 2018, January 28, 2017, and January 30,2016, the Company recorded $0.3 million of revenue related to gift card breakage.InventoriesInventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out (“FIFO”) method. Appropriate consideration isgiven to obsolescence, excess quantities, and other factors, including the popularity of a pattern or product, in evaluating net realizable value. We recordvaluation adjustments to our inventories, which are reflected in cost of sales, if the cost of specific inventory items on hand exceeds the amount we expect torealize from the ultimate sale or disposal of the inventory. This adjustment calculation requires us to make assumptions and estimates, which are based onfactors such as merchandise seasonality, historical trends, and estimated sales and inventory levels, including sell-through of remaining units. In addition, aspart of inventory adjustments, we provide for inventory shrinkage based on historical trends from our physical inventory counts. We perform physicalinventory counts throughout the year and adjust the shrinkage provision accordingly.The balance of inventory adjustments was $2.7 million and $2.6 million for these matters as of the fiscal years ended February 3, 2018, and January 28, 2017,respectively. The balance related primarily to certain collections being discontinued or currently discontinued by the Company and retired patterns.Inventory adjustments during fiscal 2018 primarily related to product categories being discontinued, partially offset by the sell-through of certain reservedinventory categories. We have the ability to move retired finished goods through a number of channels, including the annual outlet sale, our website andonline outlet site, factory outlet stores, and through third-party liquidators as needed.48Table of ContentsIncome TaxesOur effective tax rate is based on our pre-tax income, statutory tax rates, tax laws and regulations, and tax planning opportunities available in thejurisdictions in which we operate. Significant judgment is required in determining our annual tax expense and in evaluating our tax positions. We establishreserves to remove some or all of the tax benefit of any of our tax positions at the time we determine that the positions become uncertain based upon one ofthe following: (1) the tax position is not “more likely than not” to be sustained; (2) the tax position is “more likely than not” to be sustained, but for a lesseramount; or (3) the tax position is “more likely than not” to be sustained, but not in the financial period in which the tax position was originally taken. Taxingauthorities periodically audit our income tax returns. We believe that our tax filing positions are reasonable and legally supportable. Taxing authorities,however, may take a contrary position. Our results of operations and effective tax rate in a given period could be impacted if, upon final resolution withtaxing authorities, we prevail in positions for which we have established reserves, or are required to pay amounts in excess of established reserves. Thebalance of the gross amount of unrecognized tax benefits (excluding interest and penalties) was $0.1 million, $0.9 million, and $3.1 million as of February 3,2018, January 28, 2017, and January 30, 2016, respectively. A benefit of $0.5 million, a benefit of $1.9 million, and an expense of $0.1 million wasrecognized in income tax expense for these matters during the fiscal years ended February 3, 2018, January 28, 2017, and January 30, 2016, respectively.On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. The Tax Act includes, among other things, a corporate tax ratedecrease from 35% to 21% effective for tax years beginning after December 31, 2017, bonus depreciation that will allow for full expensing for qualifiedproperty, the transition of U.S. international taxation from a worldwide system to a territorial system with a new provision designed to tax global intangiblelow-taxed income (“GILTI”), and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings. As a result of the enactmentof the Tax Act, we recorded $2.1 million in provisional income tax expense during the fourth quarter of fiscal 2018 based upon our understanding of the TaxAct and guidance as of the date of this filing. Any resulting changes to the provisional estimates and amounts not yet estimated will be recognized as anadjustment to tax expense in the reporting period that the amounts are determined. Refer to Note 5 to the Notes to the Consolidated Financial Statementsherein for additional information regarding the Tax Act.Valuation of Long-lived AssetsProperty, plant, and equipment assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an assetmay not be recoverable. In evaluating an asset for recoverability, we estimate the future cash flows expected to result from the use of the asset at the storelevel, the lowest identifiable level of cash flow, if applicable. If the sum of the estimated undiscounted future cash flows related to the asset is less than thecarrying value, we recognize a loss equal to the difference between the carrying value and the fair value, usually determined by an estimated discounted cashflow analysis of the asset. Factors used in the valuation of long-lived assets include, but are not limited to, our plans for future operations, brand initiatives,recent operating results, and projected future cash flows. With respect to our stores, we analyze store economics, location within the shopping center, the sizeand shape of the space, and desirable co-tenancies in our selection process. Impairment charges are classified in SG&A expenses and were $6.3 million, $12.7million, and $2.8 million for the periods ended February 3, 2018, January 28, 2017, and January 30, 2016, respectively.The discounted cash flow models used to estimate the applicable fair values involve numerous estimates and assumptions that are highly subjective. Changesto these estimates and assumptions could materially impact the fair value estimates. The estimates and assumptions critical to the overall fair value estimatesinclude: (1) estimated future cash flow generated at the store level; and (2) discount rates used to derive the present value factors used in determining the fairvalues. These and other estimates and assumptions are impacted by economic conditions and our expectations and may change in the future based on period-specific facts and circumstances. If economic conditions were to deteriorate, future impairment charges may be required.Transactions with Related PartiesSee Item 13, “Certain Relationships and Related Transactions, and Director Independence,” of this report for information regarding transactions with relatedparties.49Table of ContentsItem 7A. Quantitative and Qualitative Disclosures About Market RiskInterest Rate RiskWe are subject to interest rate risk in connection with borrowings under our second amended and restated credit agreement, which bear interest at variablerates. The second amended and restated credit agreement allows for a revolving credit commitment of $125.0 million, bearing interest at a variable rate, basedon (A) the ABR plus the Applicable Margin, where the ABR is the highest of (i) the prime rate, (ii) the federal funds rate plus 0.5%, and (iii) Adjusted LIBORfor a one-month interest period plus 1%, and the Applicable Margin is a percentage ranging from 0.00% to 0.70% depending upon the Company's leverageratio or (B) Adjusted LIBOR plus the Applicable Margin, where Adjusted LIBOR means LIBOR, as adjusted for statutory reserve requirements foreurocurrency liabilities, and Applicable Margin is a percentage ranging from 1.00% to 1.70% depending upon the Company's leverage ratio. Assumingborrowings available under the second amended and restated credit agreement are fully extended, each quarter point increase or decrease in the interest ratewould change our annual interest expense by approximately $0.3 million.Impact of InflationOur results of operations and financial condition are presented based on historical cost. Although it is difficult to accurately measure the impact of inflationdue to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our results of operations and financial condition have beenimmaterial.Foreign Exchange Rate RiskWe source a majority of our materials from various suppliers primarily in China and South Korea. Substantially all purchases and sales involving foreignpersons are denominated in U.S. dollars, and therefore we do not hedge using any derivative instruments. Historically, we have not been impacted materiallyby changes in exchange rates.50Table of ContentsItem 8. Financial Statements and Supplementary DataVera Bradley, Inc.Index to Consolidated Financial Statements Reports of Independent Registered Public Accounting Firms52Consolidated Balance Sheets as of February 3, 2018, and January 28, 201755Consolidated Statements of Income for the fiscal years ended February 3, 2018, January 28, 2017, and January 30, 201656Consolidated Statements of Comprehensive Income for the fiscal years ended February 3, 2018, January 28, 2017, and January 30, 201657Consolidated Statements of Shareholders’ Equity for the fiscal years ended February 3, 2018, January 28, 2017, and January 30, 201658Consolidated Statements of Cash Flows for the fiscal years ended February 3, 2018, January 28, 2017, and January 30, 201659Notes to Consolidated Financial Statements6051Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Shareholders and the Board of Directors ofVera Bradley, Inc.Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of Vera Bradley, Inc. and subsidiaries (the “Company”) as of February 3, 2018 and January28, 2017, the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows, for the years then ended, and therelated notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, thefinancial position of the Company as of February 3, 2018 and January 28, 2017, and the results of its operations and its cash flows for the years then ended, inconformity with accounting principles generally accepted in the United States of America.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company'sinternal control over financial reporting as of February 3, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by theCommittee of Sponsoring Organizations of the Treadway Commission and our report dated April 3, 2018, expressed an unqualified opinion on theCompany's internal control over financial reporting.Basis for OpinionThese financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financialstatements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Companyin accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing proceduresto assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also includedevaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financialstatements. We believe that our audits provide a reasonable basis for our opinion./s/ Deloitte & Touche LLPIndianapolis, IndianaApril 3, 2018We have served as the Company’s auditor since calendar 2016.52Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Shareholders and the Board of Directors ofVera Bradley, Inc.Opinion on Internal Control over Financial ReportingWe have audited the internal control over financial reporting of Vera Bradley, Inc and subsidiaries (the “Company”) as of February 3, 2018, based on criteriaestablished in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 3, 2018, based on criteriaestablished in Internal Control - Integrated Framework (2013) issued by COSO.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidatedfinancial statements as of and for the year ended February 3, 2018, of the Company and our report dated April 3, 2018, expressed an unqualified opinion onthose financial statements.Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Ourresponsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firmregistered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and theapplicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operatingeffectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. Webelieve that our audit provides a reasonable basis for our opinion.Definition and Limitations of Internal Control over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate./s/ Deloitte & Touche LLPIndianapolis, IndianaApril 3, 201853Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Shareholders ofVera Bradley, Inc.We have audited the accompanying consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for the year inthe period ended January 30, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe thatour audit provides a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of their operations and theircash flows for year in the period ended January 30, 2016, in conformity with U.S. generally accepted accounting principles./s/ Ernst & Young LLPIndianapolis, IndianaMarch 29, 201654Table of ContentsVera Bradley, Inc.Consolidated Balance Sheets(in thousands) February 3, 2018 January 28, 2017Assets Current assets: Cash and cash equivalents $68,751 $86,375Short-term investments 54,150 30,152Accounts receivable, net 15,566 23,313Inventories 87,838 102,283Income taxes receivable 4,391 3,217Prepaid expenses and other current assets 11,327 10,237Total current assets 242,023 255,577Property, plant, and equipment, net 86,463 101,577Long-term investments 15,515 —Deferred income taxes 5,385 13,539Other assets 1,283 2,816Total assets $350,669 $373,509Liabilities and Shareholders’ Equity Current liabilities: Accounts payable $13,503 $32,619Accrued employment costs 13,616 12,474Other accrued liabilities 12,343 16,906Income taxes payable 812 508Total current liabilities 40,274 62,507Long-term liabilities 25,112 27,216Total liabilities 65,386 89,723Commitments and contingencies Shareholders’ equity: Preferred stock; 5,000 shares authorized, no shares issued or outstanding — —Common stock, without par value; 200,000 shares authorized, 41,102 and 40,927 shares issued and 35,459and 36,218 outstanding, respectively — —Additional paid-in capital 91,192 88,739Retained earnings 270,783 263,767Accumulated other comprehensive loss (114) (50)Treasury stock (76,578) (68,670)Total shareholders’ equity 285,283 283,786Total liabilities and shareholders’ equity $350,669 $373,509The accompanying notes are an integral part of these consolidated financial statements.55Table of ContentsVera Bradley, Inc.Consolidated Statements of Income(in thousands, except per share data) Fiscal Year Ended February 3, 2018 January 28, 2017 January 30, 2016Net revenues $454,648 $485,937 $502,598Cost of sales 200,639 209,891 221,409Gross profit 254,009 276,046 281,189Selling, general, and administrative expenses 239,810 249,155 236,836Other income 782 1,329 2,369Operating income 14,981 28,220 46,722Interest (income) expense, net (413) 178 263Income before income taxes 15,394 28,042 46,459Income tax expense 8,378 8,284 18,901Net income $7,016 $19,758 $27,558Basic weighted-average shares outstanding 35,925 36,838 38,795Diluted weighted-average shares outstanding 36,026 36,970 38,861 Basic net income per share $0.20 $0.54 $0.71Diluted net income per share $0.19 $0.53 $0.71The accompanying notes are an integral part of these consolidated financial statements.56Table of ContentsVera Bradley, Inc.Consolidated Statements of Comprehensive Income(in thousands) Fiscal Year Ended February 3, 2018 January 28, 2017 January 30, 2016Net income $7,016 $19,758 $27,558Unrealized loss on available for sale investments (51) — —Cumulative translation adjustment (13) (7) (28)Comprehensive income, net of tax $6,952 $19,751 $27,530The accompanying notes are an integral part of these consolidated financial statements.57Table of ContentsVera Bradley, Inc.Consolidated Statements of Shareholders’ Equity($ in thousands, except share data) Number of Shares AccumulatedOtherComprehensiveLoss CommonStock TreasuryStock AdditionalPaid-inCapital RetainedEarnings TreasuryStock TotalEquityBalance at January 31, 2015 40,074,310 620,985 $80,992 $216,451 $(15) $(12,957) $284,471Net income — — — 27,558 — — 27,558Translation adjustments — — — — (28) — (28)Restricted shares vested, net of repurchasefor taxes 108,228 — (583) — — — (583)Stock-based compensation — — 5,027 — — — 5,027Treasury stock purchased (2,481,367) 2,481,367 — — — (31,190) (31,190)Balance at January 30, 2016 37,701,171 3,102,352 $85,436 $244,009 $(43) $(44,147) $285,255Net income — — 19,758 — — 19,758Translation adjustments — — — — (7) — (7)Restricted shares vested, net of repurchasefor taxes 123,002 — (729) — — — (729)Stock-based compensation — — 4,032 — — — 4,032Treasury stock purchased (1,606,102) 1,606,102 — — — (24,523) (24,523)Balance at January 28, 2017 36,218,071 4,708,454 $88,739 $263,767 $(50) $(68,670) $283,786Net income — — — 7,016 — — 7,016Translation adjustments — — — — (13) — (13)Unrealized loss on available for saleinvestments — — — — (51) — (51)Restricted shares vested, net of repurchasefor taxes 174,985 — (618) — — — (618)Stock-based compensation — — 3,071 — — — 3,071Treasury stock purchased (934,031) 934,031 — — — (7,908) (7,908)Balance at February 3, 2018 35,459,025 5,642,485 $91,192 $270,783 $(114) $(76,578) $285,283The accompanying notes are an integral part of these consolidated financial statements.58Table of ContentsVera Bradley, Inc.Consolidated Statements of Cash Flows(in thousands) Fiscal Year Ended February 3, 2018 January 28, 2017 January 30, 2016Cash flows from operating activities Net income $7,016 $19,758 $27,558Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property, plant, and equipment 19,570 19,516 19,418Impairment charges 6,298 12,706 2,755Provision for doubtful accounts 425 439 515Loss on disposal of property, plant, and equipment 15 14 141Stock-based compensation 3,071 4,032 5,027Deferred income taxes 8,154 (2,176) (3,340)Gain on short-term investment — (152) —Cash gain on investments 162 — —Other non-cash charges, net 88 — —Changes in assets and liabilities: Accounts receivable 7,322 7,542 (435)Inventories 14,445 11,307 (15,187)Prepaid expenses and other assets 566 (798) (2,571)Accounts payable (18,214) 9,001 (8,665)Income taxes (870) (12,009) 12,508Accrued and other liabilities (5,406) (3,994) 5,546Net cash provided by operating activities 42,642 65,186 43,270Cash flows from investing activities Purchases of property, plant, and equipment (11,822) (20,778) (26,322) Purchases of investments (85,530) (30,000) — Proceeds from maturities and sales of investments 45,716 — — Proceeds from disposal of property, plant, and equipment 32 8 —Net cash used in investing activities (51,604) (50,770) (26,322)Cash flows from financing activities Tax withholdings for equity compensation (618) (729) (583)Repurchase of common stock (7,908) (24,959) (30,870)Payments of debt-issuance costs (123) — —Other financing activities, net — (27) (78)Net cash used in financing activities (8,649) (25,715) (31,531)Effect of exchange rate changes on cash and cash equivalents (13) (7) (28)Net decrease in cash and cash equivalents (17,624) (11,306) (14,611)Cash and cash equivalents, beginning of period 86,375 97,681 112,292Cash and cash equivalents, end of period $68,751 $86,375 $97,681Supplemental disclosure of cash-flow information Cash paid for income taxes, net $1,942 $24,824 $9,302Cash paid for interest $187 $248 $259Supplemental disclosure of non-cash activity Non-cash operating, investing, and financing activities Repurchase of common stock incurred but not yet paid As of February 3, 2018, January 28, 2017 and January 30, 2016 $— $— $436 As of January 28, 2017, January 30, 2016 and January 31, 2015 $— $436 $116 Purchases of property, plant, and equipment incurred but not yet paid As of February 3, 2018, January 28, 2017 and January 30, 2016 $1,183 $2,204 $2,872 As of January 28, 2017, January 30, 2016 and January 31, 2015 $2,204 $2,872 $2,172The accompanying notes are an integral part of these consolidated financial statements.59Table of ContentsVera Bradley, Inc.Notes to Consolidated Financial Statements1.Description of the CompanyVera Bradley, Inc. (“Vera Bradley” or the “Company”) is a leading designer of women’s handbags, luggage and travel items, fashion and homeaccessories, and unique gifts. Founded in 1982 by friends Barbara Bradley Baekgaard and Patricia R. Miller, the brand’s innovative designs, iconicpatterns, and brilliant colors inspire and connect women across the country.Vera Bradley offers a multi-channel sales model, as well as a focus on service and a high level of customer engagement. The Company sells its productsthrough two reportable segments: Direct and Indirect. The Direct business consists of sales of Vera Bradley products through the Company’s full-line andfactory outlet stores in the United States, verabradley.com, the Company’s online outlet site, direct-to-consumer eBay sales, and the Company’s annualoutlet sale in Fort Wayne, Indiana. As of February 3, 2018, the Company operated 109 full-line stores and 51 factory outlet stores. The Indirect businessconsists of sales of Vera Bradley products to approximately 2,400 specialty retail locations, substantially all of which are located in the United States, aswell as department stores, national accounts, third party e-commerce sites, third-party inventory liquidators, and through licensing agreements.Principles of ConsolidationThe consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company has eliminatedintercompany balances and transactions in consolidation.Fiscal PeriodsThe Company utilizes a 52-53 week fiscal year ended on the Saturday closest to January 31. As such, fiscal year 2018, ending on February 3, 2018,reflected a 53-week period. Fiscal years 2017 and 2016, ending on January 28, 2017 and January 30, 2016, respectively, each reflected a 52-week period. 2.Summary of Significant Accounting PoliciesUse of Significant EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requiresmanagement to make estimates and assumptions that affect the reported amounts of the Company’s assets, liabilities, revenues, and expenses, as well asthe disclosures relating to contingent assets and liabilities at the date of the consolidated financial statements. Significant areas requiring the use ofmanagement estimates include the valuation of inventories, accounts receivable valuation allowances, sales return allowances, and the useful lives ofassets for depreciation or amortization. Actual results could differ from these estimates. The Company revises its estimates and assumptions as newinformation becomes available.Cash and Cash EquivalentsCash and cash equivalents represent cash on hand, deposits with financial institutions, and investments with an original maturity of three months or less.InvestmentsShort-term investments consist of investments with a maturity within one year of the balance sheet date. As of February 3, 2018, these investmentsconsisted of a certificate of deposit, municipal securities, U.S. and non-U.S. corporate debt securities, and commercial paper. As of January 28, 2017,short-term investments consisted of a certificate of deposit with a maturity of one year and a one-time option to accelerate maturity to 31 days withoutpenalty. Long-term investments consist of investments with a maturity of greater than one year from the balance sheet date. As of February 3, 2018, theseinvestments consisted of municipal securities, U.S. and non-U.S. corporate debt securities, and U.S. treasury securities. The Company did not have long-term investments as of January 28, 2017. The Company’s objective with respect to these investments is to earn a higher rate of return, relative to depositaccounts, on funds that are otherwise not anticipated to be required to meet liquidity needs in the near term while maintaining a low level of investmentrisk. Refer to Note 14 herein for additional information regarding the Company's investments.60Table of ContentsVera Bradley, Inc.Notes to Consolidated Financial StatementsInventoriesInventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out (“FIFO”) method. Appropriateconsideration is given to obsolescence, excess quantities, and other factors, including the popularity of a pattern or product, in evaluating net realizablevalue. The Company's inventory consists solely of finished goods.Property, Plant, and EquipmentProperty, plant, and equipment are carried at cost and depreciated or amortized over the following estimated useful lives using the straight-line method: Buildings and building improvements ..............................................39.5 years Land improvements ...........................................................................5 – 15 years Furniture and fixtures, and leasehold improvements ........................3 – 10 years Equipment .........................................................................................7 years Vehicles .............................................................................................5 years Computer equipment and software ...................................................3 – 5 years Leasehold improvements are amortized over the shorter of the life of the asset or the lease term. Lease terms typically range from three to ten years.When a decision is made to abandon property, plant, and equipment prior to the end of the previously estimated useful life, depreciation or amortizationestimates are revised to reflect the use of the asset over the shortened estimated useful life. At the time of disposal, the cost of assets sold or retired and therelated accumulated depreciation or amortization are removed from the accounts and any resulting loss is included in the Consolidated Statements ofIncome.Property, plant, and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assetsmay not be recoverable. The reviews are conducted at the lowest identifiable level of cash flows. If the estimated undiscounted future cash flows relatedto the property, plant, and equipment are less than the carrying value, the Company recognizes a loss equal to the difference between the carrying valueand the fair value, as further defined below in “Fair Value of Financial Instruments.”Routine maintenance and repair costs are expensed as incurred.The Company capitalizes certain costs incurred in connection with acquiring, modifying, and installing internal-use software. Capitalized costs areincluded in property, plant, and equipment and are amortized over three to five years. Software costs that do not meet capitalization criteria are expensedas incurred.Revenue Recognition and Accounts ReceivableRevenue from the sale of the Company’s products is recognized upon customer receipt of the product when collection of the associated receivables isreasonably assured, persuasive evidence of an arrangement exists, the sales price is fixed and determinable, and ownership and risk of loss have beentransferred to the customer, which, for e-commerce and most Indirect sales, reflects an adjustment for shipments that customers have not yet received. Theadjustment of these shipments is based on actual delivery dates to the customer.Included in net revenues are product sales to Direct and Indirect customers, including amounts billed to customers for shipping fees. Costs related toshipping of product are classified in cost of sales in the Consolidated Statements of Income. Net revenues exclude sales taxes collected from customersand remitted to governmental authorities.61Table of ContentsVera Bradley, Inc.Notes to Consolidated Financial StatementsHistorical experience provides the Company the ability to reasonably estimate the amount of product sales that customers will return. Product returns areoften resalable through the Company’s annual outlet sale or other channels. Additionally, the Company reserves for customer allowances for certainIndirect retailers based upon various contract terms and other potential product credits granted to Indirect retailers. The returns and credits reserve andthe related activity for each fiscal year presented were as follows (in thousands): Balance atBeginning of Year ProvisionCharged toNet Revenues AllowancesTaken / Written Off Balance at Endof YearFiscal year ended February 3, 2018 $5,360 $23,504 $(26,169) $2,695Fiscal year ended January 28, 2017 2,317 32,905 (29,862) 5,360Fiscal year ended January 30, 2016 2,173 25,707 (25,563) 2,317The Company establishes an allowance for doubtful accounts based on historical experience and customer-specific identification and believes thatcollections of receivables, net of the allowance for doubtful accounts, are reasonably assured. The allowance for doubtful accounts was approximately$0.9 million and $0.6 million as of February 3, 2018, and January 28, 2017, respectively.The Company sells gift cards with no expiration dates to customers and does not charge administrative fees on unused gift cards. Gift cards issued by theCompany are recorded as a liability until they are redeemed, at which point revenue is recognized. In addition, the Company recognizes revenue onunredeemed gift cards when the likelihood of the gift card being redeemed is remote and there is no legal obligation to remit the value of unredeemedgift cards to the relevant jurisdictions. The Company determines the gift card breakage rate based on historical redemption patterns. The Companyrecorded $0.3 million of revenue related to gift card breakage during each of the fiscal years ended February 3, 2018, January 28, 2017, and January 30,2016. Gift card breakage is included in net revenues in the Consolidated Statements of Income, as well as Direct segment net revenues.Cost of SalesCost of sales includes material and labor costs, freight, inventory shrinkage, operating lease costs, duty, and other operating expenses, includingdepreciation of the Company’s distribution center and equipment. Costs and related expenses to purchase and distribute the products are recorded as costof sales when the related revenues are recognized.Operating Leases and Tenant-Improvement AllowancesThe Company has leases that contain rent holidays and predetermined, fixed escalations of minimum rentals. For each of these leases, the Companyrecognizes the related rent expense on a straight-line basis commencing on the date of initial possession of the leased property. The Company records thedifference between the recognized rent expense and the amount payable under the lease as a deferred rent liability. As of February 3, 2018 andJanuary 28, 2017, deferred rent liability was $12.9 million and $12.7 million, respectively, and is included within long-term liabilities on theConsolidated Balance Sheets.The Company receives tenant-improvement allowances from some of the landlords of its leased properties. These allowances generally are in the form ofcash received by the Company from its landlords as part of the negotiated lease terms. The Company records each tenant-improvement allowance as adeferred credit and amortizes the allowance on a straight-line basis as a reduction to rent expense over the term of the lease, commencing on thepossession date. As of February 3, 2018 and January 28, 2017, the deferred lease credit liability was $14.6 million and $15.8 million, respectively. Ofthis, $2.4 million is included within other accrued liabilities as of February 3, 2018 and January 28, 2017 and $12.2 million and $13.4 million isincluded within long-term liabilities on the Consolidated Balance Sheets as of February 3, 2018 and January 28, 2017, respectively.Store Pre-Opening, Occupancy, and Operating CostsThe Company charges costs associated with the opening of new stores to selling, general, and administrative expenses as incurred. Selling, general, andadministrative expenses also include store operating costs, store employee compensation, and store occupancy and supply costs.62Table of ContentsVera Bradley, Inc.Notes to Consolidated Financial StatementsStock-Based CompensationThe Company accounts for stock-based compensation using the fair-value recognition provisions of Accounting Standards Codification 718, StockCompensation. Under these provisions, for its awards of restricted stock and restricted-stock units, the Company recognizes stock-based compensationexpense in an amount equal to the fair market value of the underlying stock on the grant date of the respective award. The Company recognizes thisexpense, net of estimated forfeitures, on a straight-line basis over the requisite service period.Other Income and Advertising CostsThe Company expenses advertising costs at the time the promotion first appears in media, in stores, or on the website, and includes those costs in selling,general, and administrative expenses in the Consolidated Statements of Income. The Company classifies the related recovery of a portion of such costsfrom Indirect retailers as other income in the Consolidated Statements of Income.Total advertising expense was as follows (in thousands): Fiscal year ended February 3, 2018$26,953Fiscal year ended January 28, 201732,222Fiscal year ended January 30, 201633,392Total recovery from Indirect retailers was as follows (in thousands): Fiscal year ended February 3, 2018$367Fiscal year ended January 28, 20171,000Fiscal year ended January 30, 20162,180Debt-Issuance CostsUnamortized debt-issuance costs totaled $0.5 million as of February 3, 2018, and $0.6 million as of January 28, 2017, and are included in other assets onthe Consolidated Balance Sheets. Fiscal 2018 included $0.1 million of additional debt-issuance costs for Amendment No. 2 to the second amended andrestated credit agreement which is being amortized over the remaining term of the agreement. Refer to Note 4 herein for additional information.Amortization expense of $0.2 million is included in interest expense in the Consolidated Statements of Income for each of the fiscal years endedFebruary 3, 2018, January 28, 2017, and January 30, 2016.Fair Value of Financial InstrumentsFair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participantsat the measurement date. Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparencyof inputs to the valuation as of the measurement date:•Level 1 – Quoted prices in active markets for identical assets or liabilities;•Level 2 – Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly;•Level 3 – Unobservable inputs based on the Company’s own assumptions.The classification of fair value measurements within the hierarchy is based upon the lowest level of input that is significant to the measurement.The carrying amounts reflected on the Consolidated Balance Sheets for cash and cash equivalents, accounts receivable, other current assets, and accountspayable as of February 3, 2018 and January 28, 2017, approximated their fair values.63Table of ContentsVera Bradley, Inc.Notes to Consolidated Financial StatementsThe following table details the fair value measurements of the Company's investments as of February 3, 2018 and January 28, 2017 (in thousands): Level 1 Level 2 Level 3 February 3,2018 January 28,2017 February 3,2018 January 28,2017 February 3,2018 January 28,2017Cash equivalents (1)$1,889 $— $4,058 $— $— $—Short-term investments: Certificate of deposit— — 25,032 30,152 — — Municipal securities— — 12,942 — — — U.S. corporate debt securities— — 8,727 — — — Non-U.S. corporate debt securities— — 6,451 — — — Commercial paper— — 998 — — —Long-term investments: Municipal securities— — 5,098 — — — U.S. corporate debt securities— — 4,543 — — — U.S. treasury securities3,099 — — — — — Non-U.S. corporate debt securities— — 2,775 — — — (1) Cash equivalents include commercial paper, a money market fund, and municipal securities that have a maturity of three months or less atthe date of purchase. Due to their short maturity, the Company believes the carrying value approximates fair value.The Company has certain assets that are measured on a non-recurring basis under circumstances and events described in Note 3 herein. Thecategorization of the framework to price these assets are within Level 3 due to the subjective nature of unobservable inputs.Income TaxesThe Company accrues income taxes payable or refundable and recognizes deferred tax assets and liabilities based on differences between the book andtax bases of assets and liabilities. The Company measures deferred tax assets and liabilities using enacted rates in effect for the years in which thedifferences are expected to reverse, and recognizes the effect of a change in enacted rates in the period of enactment. As such, the Company recognizedadditional income tax expense of $2.1 million during fiscal 2018 upon the enactment of the Tax Cuts and Jobs Act. Refer to Note 5 herein for additionalinformation.The Company establishes liabilities for uncertain positions taken or expected to be taken in income tax returns, using a more-likely-than-not recognitionthreshold. The Company includes in income tax expense any interest and penalties related to uncertain tax positions.Recently Issued Accounting PronouncementsRecently Issued Accounting Pronouncements Not Yet AdoptedIn May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts withCustomers. This guidance requires companies to recognize revenue in a manner that depicts the transfer of promised goods or services to customers inamounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services. The new standard also willresult in enhanced disclosures about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Thestandard allows for either a full retrospective or a modified retrospective transition method. In August 2015, the FASB issued ASU 2015-14 to defer theeffective date of ASU 2014-09 for all entities by one year to annual periods beginning after December 15, 2017, including interim periods within thatreporting period, which for the Company is February 4, 2018 (the beginning of the Company's fiscal 2019). Earlier application is permitted as of theoriginal effective date, annual reporting periods beginning after December 2016, including interim periods within that reporting period.The Company has completed its assessment regarding the impact of the adoption of the standard on its consolidated financial statements and determinedthat the standard will impact the Company's adjustments to revenue for shipments not yet received, recognition of revenue for unredeemed gift cards, andrecognition of licensing revenue.64Table of ContentsVera Bradley, Inc.Notes to Consolidated Financial StatementsThe Company will no longer adjust revenue for shipments not yet received at each reporting period as it will recognize revenue as control is passed tothe customer. It was determined that control is passed to the customer upon shipment, consistent with when legal title is passed. This will accelerate therecognition of revenue at each reporting period compared to the Company's historical practice.Revenue for unredeemed gift cards will be estimated and recognized based on the historical patterns of gift card redemption. Historically, the Companyrecognized revenue for gift card breakage when the likelihood of the customer exercising their remaining rights became remote. This will accelerate therecognition of gift card breakage revenue at each reporting period compared to the Company's historical practice.Revenue associated with contractually guaranteed minimum royalties in sales-based royalty arrangements will be recognized straight-line over theremaining license period once determined that the minimum sales level will not be achieved. Historically, the Company recognized any excess of theguaranteed minimum royalty over the actual royalties earned at the end of the license period.The Company will adopt the standard in the first quarter of fiscal 2019 using the modified retrospective method with a cumulative adjustment tobeginning retained earnings. The Company expects this cumulative adjustment and the future impact to the Company's Consolidated Balance Sheetsand Consolidated Statements of Income to be immaterial.In February 2016, the FASB issued ASU 2016-02, Leases, which increases transparency and comparability among organizations by requiring lessees torecognize assets and liabilities on the balance sheet for the rights and obligations created by leases and disclosing key information about leasingarrangements. This guidance is effective for interim and annual periods beginning on or after December 15, 2018. The Company has operating leases atall of its retail stores; therefore, the adoption of this standard will result in a material increase of assets and liabilities on the Company's ConsolidatedBalance Sheets. The Company is continuing to evaluate the impact on its consolidated results of operations and cash flows.3.Property, Plant, and EquipmentProperty, plant, and equipment consisted of the following (in thousands): February 3, 2018 January 28, 2017Land and land improvements $5,981 $5,981Building and building improvements 46,233 46,233Furniture, fixtures, leasehold improvements, computer equipment and software 108,351 127,791Equipment and vehicles 20,264 20,329Construction in progress 903 7,885 181,732 208,219Less: Accumulated depreciation and amortization (95,269) (106,642)Property, plant, and equipment, net $86,463 $101,577Property, plant, and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assetsmay not be recoverable. The reviews are conducted at the lowest identifiable level of cash flows. If the estimated undiscounted future cash flows relatedto the property, plant, and equipment are less than the carrying value, the Company recognizes a loss equal to the difference between the carrying valueand the fair value, as further defined in Note 2. Impairment charges of $6.3 million, $12.7 million, and $2.8 million were recognized, using level 3 inputs,in the fiscal years ended February 3, 2018, January 28, 2017, and January 30, 2016, respectively, for assets related to underperforming stores and areincluded in selling, general, and administrative expenses in the Consolidated Statements of Income and in impairment charges in the ConsolidatedStatements of Cash Flows. The impairment charges are included in the Direct segment.65Table of ContentsVera Bradley, Inc.Notes to Consolidated Financial StatementsDepreciation and amortization expense associated with property, plant, and equipment, excluding impairment charges (in thousands): Fiscal year ended February 3, 2018$19,570Fiscal year ended January 28, 201719,516Fiscal year ended January 30, 201619,418 4.DebtAs of February 3, 2018 and January 28, 2017, the Company had no borrowings outstanding and availability of $125.0 million under the amended andrestated credit agreement. Second Amended and Restated Credit AgreementOn July 15, 2015, Vera Bradley Designs, Inc. (“VBD”), a wholly-owned subsidiary of the Company, entered into a Second Amended and Restated CreditAgreement among VBD, the lenders from time to time party thereto, JPMorgan Chase Bank, National Association, as administrative agent; Wells FargoBank, National Association, as syndication agent; and KeyBank National Association, as documentation agent (the “Credit Agreement”), whichamended and restated the Company's prior credit agreement. The Credit Agreement provides for certain credit facilities to VBD in an aggregate principalamount not to initially exceed $125.0 million, the proceeds of which may be used for general corporate purposes of VBD and its subsidiaries, includingbut not limited to Vera Bradley International, LLC and Vera Bradley Sales, LLC (collectively, the “Named Subsidiaries”).Amounts outstanding under the Credit Agreement bear interest, at VBD's option, at a per annum rate equal to either (A) the Alternate Base Rate (“ABR”)plus the Applicable Margin, where the ABR is the highest of (i) the prime rate, (ii) the federal funds rate plus 0.5%, and (iii) Adjusted LIBOR for a one-month interest period plus 1%, and the Applicable Margin is a percentage ranging from 0.00% to 0.70% depending upon the Company's leverage ratioor (B) Adjusted LIBOR plus the Applicable Margin, where Adjusted LIBOR means LIBOR, as adjusted for statutory reserve requirements foreurocurrency liabilities, and Applicable Margin is a percentage ranging from 1.00% to 1.70% depending upon the Company's leverage ratio. Any loansmade, or letters of credit issued, pursuant to the Credit Agreement mature on July 15, 2020.VBD's obligations under the Credit Agreement are guaranteed by the Company and the Named Subsidiaries. The obligations of VBD under the CreditAgreement are secured by first priority security interests in all of the respective assets of VBD, the Company, and the Named Subsidiaries and a pledge ofthe equity interests of VBD and the Named Subsidiaries.The Credit Agreement contains various restrictive covenants, including restrictions on the Company's ability to dispose of assets, make acquisitions orinvestments, incur debt or liens, make distributions to stockholders or repurchase outstanding stock, enter into related party transactions and makecapital expenditures, other than upon satisfaction of the conditions set forth in the Credit Agreement. The Company is also required to comply withcertain financial and non-financial covenants, including maintaining a maximum leverage ratio, a minimum ratio of EBITDAR to the sum of interestexpense plus rentals (as defined in the Credit Agreement), and a limit on capital expenditures. Upon an event of default, which includes certaincustomary events such as, among other things, a failure to make required payments when due, a failure to comply with covenants, certain bankruptcy andinsolvency events, a material adverse change (as defined in the Credit Agreement), defaults under other material indebtedness, and a change in control,the lenders may accelerate amounts outstanding, terminate the agreement, and foreclose on all collateral.On October 20, 2017, VBD entered into Amendment No. 2 (the “Amendment”) to the Credit Agreement. The Amendment modifies the ratio requirementsof certain financial covenants in the Credit Agreement including the maximum leverage ratio and the minimum ratio of EBITDAR to the sum of interestexpense plus rentals (as defined in the Credit Agreement). The Amendment also modifies certain restrictive covenants including the acquisition ofinvestments and the limit of investments in foreign subsidiaries.66Table of ContentsVera Bradley, Inc.Notes to Consolidated Financial Statements5.Income TaxesThe components of income tax expense were as follows (in thousands): February 3, 2018 January 28, 2017 January 30, 2016Current: Federal $488 $8,810 $19,823Foreign 364 526 18State (628) 1,124 2,400 224 10,460 22,241Deferred: Federal 7,476 (1,623) (2,813)State 678 (553) (527) 8,154 (2,176) (3,340)Total income tax expense $8,378 $8,284 $18,901A breakdown of the Company’s income before income taxes is as follows (in thousands): February 3, 2018 January 28, 2017 January 30, 2016Domestic $13,666 $24,891 $46,386Foreign 1,728 3,151 73Total income before income taxes $15,394 $28,042 $46,459A reconciliation of income tax expense to the amount computed at the federal statutory rate is as follows (in thousands): February 3, 2018 January 28, 2017 January 30, 2016Federal taxes at statutory rate $5,067 32.9 % $9,815 35.0 % $16,261 35.0%State and local income taxes, net offederal benefit 665 4.3 371 1.3 1,217 2.6Impact of foreign rate differential (247) (1.6) (413) (1.5) — —Change in uncertain tax positions (632) (4.1) (1,426) (5.1) — —Change in U.S. tax rate 2,026 13.2 — — — —Deemed mandatory repatriation 345 2.2 — — — —Shortfall from stock-basedcompensation 1,111 7.2 17 0.1 501 1.1Other 43 0.3 (80) (0.3) 922 2.0Total income tax expense $8,378 54.4 % $8,284 29.5 % $18,901 40.7%On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. The Tax Act includes, among other things, a corporate tax ratedecrease from 35% to 21% effective for tax years beginning after December 31, 2017, bonus depreciation that will allow for full expensing for qualifiedproperty, the transition of U.S. international taxation from a worldwide system to a territorial system with a new provision designed to tax globalintangible low-taxed income ("GILTI"), and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings. Section 15of the Internal Revenue Code stipulates that the Company's fiscal year ended February 3, 2018, has a blended federal statutory tax rate of approximately32.9%, which is based on the applicable tax rates before and after the effectiveness of the Tax Act and the number of days in the year.67Table of ContentsVera Bradley, Inc.Notes to Consolidated Financial StatementsThe Company recorded $2.1 million in provisional income tax expense during the fourth quarter of fiscal 2018 based upon its understanding of the TaxAct and guidance as of the date of this filing. Of the $2.1 million, $2.0 million was related to the remeasurement of net deferred tax assets at rates whichthey are expected to reverse in the future and $0.3 million was related to the one-time transition tax on mandatory deemed repatriation of foreignearnings, which were partially offset by a $0.2 million income tax benefit related to the blended federal statutory rate. The Tax Act established a newminimum tax on global intangible low-taxed income and the Company is currently analyzing the provision and as a result cannot reasonably estimate animpact.The ultimate impact of the Tax Act may differ from the provisional income tax expense recognized in the consolidated financial statements during thefourth quarter of fiscal 2018. These provisional amounts may differ due to, among other things, additional analysis, changes in interpretations andassumptions that the Company has made, additional regulatory guidance issued, and any additional actions the Company may take as a result of the TaxAct. The accounting for the Tax Act is expected to be complete when the fiscal 2018 federal income tax return is filed in fiscal 2019. On December 22,2017, the SEC staff issued Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant does not have thenecessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income taxeffects of the Tax Act. Consistent with this guidance, any resulting changes to the provisional estimates and amounts not yet estimated will berecognized as an adjustment to tax expense in the reporting period that the amounts are determined.Deferred income taxes reflect the net tax effects of temporary differences between the book and tax bases of assets and liabilities. Significant componentsof deferred tax assets and liabilities were as follows (in thousands): February 3, 2018 January 28, 2017Deferred tax assets: Compensation and benefits $992 $5,420Inventories 1,576 2,718Deferred credits from landlords 7,305 11,722Other 2,156 4,913Total deferred tax assets 12,029 24,773Deferred tax liabilities: Property, plant, and equipment (4,386) (8,505)Other (2,258) (2,729)Total deferred tax liabilities (6,644) (11,234)Net deferred tax assets $5,385 $13,539As of February 3, 2018, the Company remeasured the net deferred tax assets at the applicable tax rate of 21% in accordance with the Tax Act. TheCompany recorded a provisional net adjustment to deferred income tax expense of $2.0 million for the fiscal year ended February 3, 2018, for certaindeferred tax assets and deferred tax liabilities. The final impact may differ from the Company's reasonable estimate due to, among other things, additionalanalyses, changes in interpretations and assumptions that were made, additional regulatory guidance that may be issued, and actions that the Companymay take as a result of the Tax Act.68Table of ContentsVera Bradley, Inc.Notes to Consolidated Financial StatementsUncertain Tax PositionsA reconciliation of the beginning and ending gross amount of unrecognized tax benefits (excluding interest and penalties) is as follows (in thousands): February 3, 2018 January 28, 2017 January 30, 2016Beginning balance $877 $3,099 $3,018Net increases in unrecognized tax benefits as a result of current year activity — 15 81Net increases in unrecognized tax benefits as a result of prior year activity 210 — —Reductions for tax positions of prior years (877) (1,695) —Settlements — (214) —Lapse of statute of limitations (106) (328) —Ending balance $104 $877 $3,099As of February 3, 2018, $0.1 million of total unrecognized tax benefits, net of federal benefit, would, if recognized, favorably affect the effective tax ratein future periods. Total unrecognized tax benefits are currently not expected to decrease by a significant amount in the next twelve months. TheCompany recognized an immaterial amount of interest only, no penalties, related to unrecognized tax benefits in the fiscal years ended February 3, 2018,January 28, 2017, and January 30, 2016. Unrecognized tax benefits are included within long-term liabilities in the Company's Consolidated BalanceSheets.The Company files income tax returns in the U.S. federal jurisdiction and various U.S. state and foreign jurisdictions. The Company is subject to U.S.federal income tax examinations for fiscal years 2015 and forward. With a few exceptions, the Company is subject to audit by various state and foreigntaxing authorities for fiscal 2014 through the current fiscal year.6.LeasesThe Company is party to non-cancellable operating leases. Future minimum lease payments under the non-cancellable operating leases throughexpiration are as follows (in thousands and by fiscal year): Fiscal Year Amount2019 $32,7782020 31,6842021 30,8772022 28,5222023 24,852Thereafter 54,864 $203,577Rental expense for all leases was as follows (in thousands): Fiscal year ended February 3, 2018$35,663Fiscal year ended January 28, 201733,925Fiscal year ended January 30, 201632,456Lease terms generally range from three to ten years, generally ten years in the case of the Company's retail stores, with options to renew for varying terms.Future minimum lease payments relate primarily to the lease of retail space. Additionally, several lease agreements contain a provision for paymentsbased on a percentage of sales in addition to the69Table of ContentsVera Bradley, Inc.Notes to Consolidated Financial Statementsstated lease payments. Percentage rent expense was $3.1 million, $2.8 million, and $2.4 million for fiscal years ended February 3, 2018, January 28,2017, and January 30, 2016, respectively. 7.Stock-Based CompensationThe Company’s stock-based compensation consists of awards of restricted stock and restricted stock units. The Company recognized stock-basedcompensation expense of $3.1 million, $4.0 million, and $5.0 million in the fiscal years ended February 3, 2018, January 28, 2017, and January 30,2016, respectively.Awards of Restricted-Stock UnitsThe Company reserved 6,076,001 shares of common stock for issuance or transfer under the 2010 Equity and Incentive Plan, which allows for grants ofrestricted stock units, as well as other equity awards. As of February 3, 2018, there were 4,787,501 of shares remaining in that program.During the fiscal year ended February 3, 2018, the Company granted a total of 507,423 time-based and performance-based restricted stock units tocertain employees and non-employee directors under the 2010 Equity and Incentive Plan with an aggregate fair value of $4.7 million. The Companydetermined the fair value of the units based on the closing price of the Company’s common stock on the grant date.The majority of time-based restricted stock units vest and settle in shares of the Company’s common stock, on a one-for-one basis, in equal installmentson each of the first three anniversaries of the grant date. Restricted stock unit awards issued to non-employee directors vest after a one-year period fromthe grant date. The Company is recognizing the expense relating to these awards, net of estimated forfeitures, on a straight-line basis over the vestingperiod.The majority of performance-based restricted stock units vest upon the completion of a three-year period of time (cliff vesting), subject to the employee’scontinuing employment throughout the three-year performance period and the Company’s achievement of annual earnings per share targets, or otherCompany performance targets, during the three-year performance period. The Company is recognizing the expense relating to these units, net ofestimated forfeitures and based on the probable outcome of achievement of the financial targets, on a straight-line basis over the vesting period.The following table summarizes information about restricted-stock units as of and for the year ended February 3, 2018 (units in thousands): Time-basedRestricted Stock Units Performance-basedRestricted Stock Units Number ofUnits Weighted-AverageGrantDate FairValue(per unit) Number ofUnits Weighted-AverageGrantDate FairValue(per unit)Nonvested units outstanding at January 28, 2017 487 $18.04 375 $19.10Granted 295 9.31 212 9.31Vested (245) 18.08 — —Forfeited (136) 13.71 (224) 18.35Nonvested units outstanding at February 3, 2018 401 $12.38 363 $13.83 As of February 3, 2018, there was $3.0 million of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested restricted stockunits. That cost is expected to be recognized over a weighted average period of 1.3 years, subject to meeting performance conditions. The total fair valueof restricted stock units for which restrictions lapsed (vested) during fiscal 2018 was $2.1 million. 8.Commitments and ContingenciesPayment Card IncidentDescription of EventOn September 15, 2016, the Company received information from law enforcement regarding a potential data security issue related to its retail storenetwork. Findings from the investigation showed unauthorized access to the Company's payment70Table of ContentsVera Bradley, Inc.Notes to Consolidated Financial Statementsprocessing system and the installation of a program that looked for payment card data. The program was specifically designed to find track data in themagnetic stripe of a payment card that may contain the card number, cardholder name, expiration date, and internal verification code as the data wasbeing routed through the affected payment system. There is no indication that other customer information was at risk. Payment cards used at VeraBradley store locations between July 25, 2016 and September 23, 2016 may have been affected. Not all cards used in stores during this time frame wereaffected. Cards used on verabradley.com were not affected.The Company has resolved this incident and continues to work with a computer security firm to further strengthen the security of its systems to helpprevent events of this nature from happening in the future. The Company continues to support law enforcement’s investigation and also promptlynotified the payment card networks so that the banks that issue payment cards could initiate heightened monitoring on the affected cards. Claims havebeen received by some, not all, of the payment card networks for this incident which is expected to be covered by the Company's insurance, as describedbelow.Expenses Incurred and Amounts AccruedDuring the fiscal years ended February 3, 2018 and January 28, 2017, the Company recorded an immaterial amount of expense relating to the PaymentCard Incident. Expenses included remediation activities during fiscal 2018 and costs to investigate the Payment Card Incident and obtain legal andother professional services during fiscal 2017. There was no incremental expense associated with the claims received in fiscal 2018 as they are expectedto be reimbursable and probable of recovery under the Company's insurance coverage. The insurance deductible was accrued during fiscal 2017.Future CostsAdditional payment card companies and associations may require the Company to reimburse them for unauthorized card charges and costs to replacecards and may also impose fines or penalties in connection with the Payment Card Incident, and enforcement authorities may also impose fines or otherremedies against the Company. At this time, the Company cannot reasonably estimate the potential loss or range of loss related to the additional fines orpenalties that may be assessed, if any. The Payment Card Incident, including customer response and any possible third party claims or additionalassessments from payment card companies, could materially adversely affect the Company's financial condition and operating results. However, theCompany expects its insurance coverage will offset most of the expenses for the investigation and other legal and professional services associated withthe incident, possible third party claims, as well as fines, penalties, or other expenses, if any additional, imposed by payment card companies as discussedabove.Insurance CoverageThe Company maintains $15.0 million of cyber security insurance coverage above a $0.1 million deductible.Other Commitments and ContingenciesThe Company is also subject to various claims and contingencies arising in the normal course of business, including those relating to product liability,legal claims, employee benefits, environmental, and other matters. Management believes that at this time it is not probable that any of these claims willhave a material adverse effect on the Company’s financial condition, results of operations, or cash flows. However, the outcomes of legal proceedingsand claims brought against the Company are subject to uncertainty and future developments could cause these actions or claims, individually or in theaggregate, to have a material adverse effect on the Company’s financial condition, results of operations, or cash flows of a particular reporting period.71Table of ContentsVera Bradley, Inc.Notes to Consolidated Financial Statements9.401(k) Profit Sharing Plan and TrustThe Company has a 401(k) profit sharing plan and trust for all qualified employees and provides a 100% match for the first 3% of employeecontributions and a 50% match for the next 2% of employee contributions, for a maximum Company match of 4% of employee contributions, limited tothe annual legal allowable limit. Additionally, the Company has the option of making discretionary profit sharing payments to the plan as approved bythe board of directors. As of February 3, 2018, January 28, 2017, and January 30, 2016, no discretionary profit sharing payments had been approved. TheCompany recognizes 401(k) Company contributions within cost of sales, as the related revenues are recognized, for employees related to distributioncenter, sourcing, and other related functions and selling, general, and administrative expenses for all other employees. Total Company contributions tothe plan were as follows (in thousands): Fiscal year ended February 3, 2018$1,533Fiscal year ended January 28, 20171,624Fiscal year ended January 30, 20161,965 10.Related-Party TransactionsDuring each of the fiscal years ended February 3, 2018 and January 28, 2017, the Company made charitable contributions of approximately $0.1 millionto the Vera Bradley Foundation for Breast Cancer (the “Foundation”). The Company did not make charitable contributions during the fiscal year endedJanuary 30, 2016. The Foundation was founded by two of the Company’s directors, who are also on the board of directors of the Foundation. Theliability associated with commitments to the Foundation was approximately $0.4 million as of February 3, 2018 and January 28, 2017. The liabilityconsisted of pass-through donations from customers and is included in other accrued liabilities in the Consolidated Balance Sheets.The associated expense for contributions to the Foundation, which is included in selling, general, and administrative expenses, was as follows (inthousands): Fiscal year ended February 3, 2018$140Fiscal year ended January 28, 201753Fiscal year ended January 30, 2016—11.Earnings Per ShareBasic net income per share is computed based on the weighted-average number of common shares outstanding during the period. Diluted net income pershare is computed based on the weighted-average number of shares of common stock plus the effect of dilutive potential common shares outstandingduring the period using the treasury stock method. Dilutive potential common shares include outstanding restricted stock and restricted-stock units. Thecomponents of basic and diluted net income per share are as follows (in thousands, except per share data): Fiscal Year Ended February 3, 2018 January 28, 2017 January 30, 2016Numerator: Net income $7,016 $19,758 $27,558Denominator: Weighted-average number of common shares (basic) 35,925 36,838 38,795Dilutive effect of stock-based awards 101 132 66Weighted-average number of common shares (diluted) 36,026 36,970 38,861Earnings per share: Basic $0.20 $0.54 $0.71Diluted $0.19 $0.53 $0.7172Table of ContentsVera Bradley, Inc.Notes to Consolidated Financial StatementsAs of February 3, 2018, January 28, 2017, and January 30, 2016, there were an immaterial number of additional shares issuable upon the vesting ofrestricted stock units that were excluded from the diluted share calculations because they were anti-dilutive. The diluted share calculations includeperformance-based restricted stock units for completed performance periods. 12.Common StockOn December 8, 2015, the Company's board of directors approved a share repurchase program (the “2015 Share Repurchase Program”) authorizing up to$50.0 million of repurchases of shares of the Company's common stock. On November 30, 2017, the board of directors authorized the Company toextend the 2015 Share Repurchase Plan to December 31, 2018. The prior share repurchase program (the “2014 Share Repurchase Program”) wasapproved by the board of directors on September 9, 2014, and authorized share repurchases up to $40.0 million. The 2014 Share Repurchase Programwas completed in fiscal 2016.During the fiscal year ended February 3, 2018, the Company purchased and held 934,031 shares at an average price of $8.47 per share, excludingcommissions, for an aggregate amount of $7.9 million, under the 2015 Share Repurchase Program.During the fiscal year ended January 28, 2017, the Company purchased and held 1,606,102 shares at an average price of $15.27 per share, excludingcommissions, for an aggregate amount of $24.5 million, under the 2015 Share Repurchase Program.During the fiscal year ended January 30, 2016, the Company purchased and held 2,481,367 shares at an average price of $12.57 per share, excludingcommissions, for an aggregate amount of $31.2 million. Of these purchases, 283,354 shares at an average price of $14.64 per share, for an aggregateamount of $4.1 million, were purchased under the 2015 Share Repurchase Plan.As of February 3, 2018, there was $13.4 million remaining available to repurchase shares of the Company's common stock under the 2015 ShareRepurchase Program.As of February 3, 2018, the Company held as treasury shares 5,642,485 shares of its common stock at an average price of $13.57 per share, excludingcommissions, for an aggregate carrying amount of $76.6 million. The Company’s treasury shares may be issued under the 2010 Equity and IncentivePlan or for other corporate purposes.13.Vision 20/20 Restructuring and Other ChargesFifty-Three Weeks Ended February 3, 2018Vision 20/20 Initiatives and Charges. During fiscal 2018, the Company launched its Vision 20/20 strategic plan, which involves a more aggressiveapproach to turn around its business over the next three years. The plan is primarily focused on product and pricing initiatives, as well as selling, general,and administrative expense reduction initiatives. The product and pricing initiatives include restoring the Company's full-price business by significantlyreducing the amount of clearance merchandise offered on verabradley.com and in its full-line stores, streamlining current product offerings byeliminating unproductive or incongruent categories and SKUs from its assortment, and introducing tighter guardrails around new product categories,patterns, and pricing. The Company expects to reduce selling, general, and administrative expenses by right-sizing the corporate infrastructure to betteralign with the size of the business, lowering marketing spending by focusing on efficiencies, and taking a more aggressive stance on closingunderperforming full-line stores. The implementation of the plan began in the third quarter of fiscal 2018, but the majority of the product and pricinginitiatives will not be completed until fiscal 2019. There were no charges relating to Vision 20/20 during fiscal 2017 or fiscal 2016.73Table of ContentsVera Bradley, Inc.Notes to Consolidated Financial StatementsThe Company has incurred the following Vision 20/20-related charges during the fiscal year ended February 3, 2018 (in thousands): Fiscal 2018 Statements of Income Line Item Total Expense Reportable Segment UnallocatedCorporateExpensesSG&A Cost of Sales Direct Indirect Asset impairment charges (1)$6,298 $— $6,298 $6,298 $— $—Strategic consulting charges (2)4,649 — 4,649 — — 4,649Severance charges3,867 199 4,066 826 1,184 2,056Inventory-related charges (3)— 935 935 — 935 —Other charges (4)751 — 751 466 230 55Total$15,565 $1,134 $16,699(5) $7,590 $2,349 $6,760(1) Refer to Note 3 herein for additional details(2) Consulting charges for the identification and implementation of Vision 20/20 initiatives(3) Inventory adjustments for the discontinuation of certain inventory categories(4) Includes a net lease termination charge ($399 recognized within the Direct segment) and accelerated depreciation charges and other charges($67 recognized within the Direct segment, $230 recognized within the Indirect segment, and $55 recognized within corporate unallocatedexpenses)(5) After the associated tax benefit, the charges totaled $10.6 millionA summary of charges and related liabilities associated with the Vision 20/20 initiatives are as follows (in thousands): AssetImpairmentCharges StrategicConsultingCharges SeveranceCharges Inventory-RelatedCharges Other Charges TotalFiscal 2018 charges$6,298 $4,649 $4,066 $935 $751 $16,699Cash payments— (4,649) (2,508) — (411) (7,568)Non-cash charges(6,298) — — (935) (340) (7,573)Liability as of February 3, 2018 (1)$— $— $1,558 $— $— $1,558(1) The remaining liability associated with severance charges is included within accrued employment costs in the Consolidated Balance SheetsOther Charges. Other charges recognized in selling, general, and administrative expenses during fiscal 2018, before the implementation of Vision 20/20,totaled $2.8 million (1.7 million after the associated tax benefit). These pre-tax charges consisted of $2.5 million in severance charges (recognized withincorporate unallocated expenses) and $0.3 million for a net lease termination charge (recognized within the Direct segment). There were no remainingliabilities associated with these charges as of February 3, 2018.Other charges recognized in tax expense during fiscal 2018 totaled $2.1 million related to the Tax Cuts and Jobs Act further described in Note 5 herein.Fifty-Two Weeks Ended January 28, 2017Other charges recognized in selling, general, and administrative expenses during fiscal 2017 totaled $13.6 million ($8.6 million after the associated taxbenefit) and consisted of store impairment charges of $12.7 million (recognized within the Direct segment) and a severance charge of $0.9 million(recognized within corporate unallocated expenses). Refer to Note 3 herein for additional details regarding the store impairment charges. Fiscal 2017also included a $1.6 million tax benefit (reflected in income tax expense) related to the release of certain income tax reserves.Fifty-Two Weeks Ended January 30, 2016In the first quarter of fiscal 2016, the Company closed its manufacturing facility located in New Haven, Indiana. The Company incurred restructuring andother charges during the first quarter of fiscal 2016 of approximately $3.4 million ($2.1 million after the associated tax benefit), related to the facilityclosing. These pre-tax charges included:74Table of ContentsVera Bradley, Inc.Notes to Consolidated Financial Statements•Severance and benefit costs of approximately $1.7 million;•Lease termination costs of approximately $0.7 million;•Inventory-related charges of approximately $0.6 million; and•Other associated net costs, which include accelerated depreciation related to fixed assets, of approximately $0.4 million.These charges are reflected in cost of sales in the Company's Consolidated Financial Statements ($2.3 million was recognized within the Direct segmentand $1.1 million was recognized within the Indirect segment). All production from the facility was absorbed by the Company’s third-partymanufacturing suppliers.Additional charges, incurred in the first quarter of fiscal 2016, totaled approximately $5.3 million ($3.3 million after the associated tax benefit). Thesepre-tax charges included:•$2.8 million for store impairment charges (recognized within the Direct segment; refer to Note 3 herein for additional details);•$1.3 million for a severance charge (recognized within corporate unallocated expenses); and•$1.2 million due to a retail store early lease termination agreement (recognized within the Direct segment).The first quarter of fiscal 2016 also included a $0.6 million tax expense (reflected in income tax expense) related to an increase in income tax reserves foruncertain federal and state tax positions related to research and development tax credits.14.InvestmentsCash EquivalentsInvestments classified as cash equivalents relate to highly-liquid investments with a maturity of three months or less at the date of purchase. As ofFebruary 3, 2018, these investments in the Company's portfolio consisted of commercial paper, a money market fund, and municipal securities.Short-Term InvestmentsAs of February 3, 2018, short-term investments consisted of a certificate of deposit, municipal securities, U.S. and non-U.S. corporate debt securities, andcommercial paper with a maturity within one year of the balance sheet date. These securities are classified as available-for-sale; therefore, unrealizedgains and losses are recorded within other comprehensive income. Interest income earned is recorded within interest (income) expense, net, in theCompany's Consolidated Statements of Income. As of January 28, 2017, short-term investments consisted of a certificate of deposit with an originalmaturity of one year and a one-time option to accelerate maturity to 31 days without penalty. The certificate of deposit matured during the first quarter offiscal 2018. Interest income from the certificate of deposit is included in interest (income) expense, net, in the Company's Consolidated Statements ofIncome.The Company held $54.2 million and $30.2 million in short-term investments as of February 3, 2018 and January 28, 2017, respectively. The followingtable summarizes the Company's short-term investments (in thousands): February 3, 2018 January 28, 2017Certificate of deposit$25,032 $30,152Municipal securities12,942 —U.S. corporate debt securities8,727 —Non-U.S. corporate debt securities6,451 —Commercial paper998 —Total short-term investments$54,150 $30,15275Table of ContentsVera Bradley, Inc.Notes to Consolidated Financial StatementsLong-Term InvestmentsAs of February 3, 2018, long-term investments consisted of municipal securities, U.S. and non-U.S. corporate debt securities, and U.S. treasury securitieswith a maturity greater than one year from the balance sheet date. These securities are classified as available-for-sale; therefore, unrealized gains andlosses are recorded within other comprehensive income. Interest income earned is recorded within interest (income) expense, net, in the Company'sCondensed Consolidated Statements of Income.The Company held $15.5 million in long-term investments as of February 3, 2018. The Company did not have long-term investments as of January 28,2017. The following table summarizes the Company's long-term investments (in thousands): February 3, 2018 January 28, 2017Municipal securities$5,098 $—U.S. corporate debt securities4,543 —U.S. treasury securities3,099 —Non-U.S. corporate debt securities2,775 —Total long-term investments$15,515 $—There were no material gross unrealized gains or losses on available-for-sale securities as of February 3, 2018 and January 28, 2017.15.Segment ReportingThe Company has two operating segments, which are also its reportable segments: Direct and Indirect. These operating segments are components of theCompany for which separate financial information is available and for which operating results are evaluated on a regular basis by the chief operatingdecision maker in deciding how to allocate resources and in assessing the performance of the segments.The Direct segment includes the Company’s full-line and factory outlet stores, the Company’s website, verabradley.com, the Company’s online outletsite, direct-to-consumer eBay sales, and the annual outlet sale. Revenues generated through this segment are driven through the sale of Company-branded products from Vera Bradley to end consumers.The Indirect segment represents revenues generated through the distribution of Company-branded products to specialty retailers representingapproximately 2,400 locations, substantially all of which are located in the United States, as well as select department stores, national accounts, thirdparty e-commerce sites, third-party inventory liquidators, and licensing agreements. No customer accounted for 10% or more of the Company’s netrevenues during fiscal years 2018, 2017, and 2016.Corporate costs represent the Company’s administrative expenses, which include, but are not limited to: human resources, legal, finance, informationtechnology, and various other corporate-level-activity-related expenses. All intercompany-related activities are eliminated in consolidation and areexcluded from the segment reporting.Company management evaluates segment operating results based on several indicators. The primary or key performance indicators for each segment arenet revenues and operating income. The table below represents key financial information for each of the Company’s operating and reportable segments,Direct and Indirect.The accounting policies of the segments are the same as those described in Note 2. The Company does not report depreciation or amortization expense,total assets, or capital expenditures by segment as such information is neither used by management nor accounted for at the segment level.76Table of ContentsVera Bradley, Inc.Notes to Consolidated Financial StatementsNet revenues and operating income information for the Company’s reportable segments consisted of the following (in thousands): Fiscal Year Ended February 3, 2018 January 28, 2017 January 30, 2016Segment net revenues: Direct $351,786 $355,175 $351,286Indirect 102,862 130,762 151,312Total $454,648 $485,937 $502,598Segment operating income: Direct $60,979 $62,577 $74,114Indirect 34,763 50,955 60,409Total $95,742 $113,532 $134,523Reconciliation: Segment operating income $95,742 $113,532 $134,523Less: Unallocated corporate expenses (80,761) (85,312) (87,801)Operating income $14,981 $28,220 $46,722Sales outside of the United States were immaterial for all periods presented.Revenues to external customers for Vera Bradley brand products are attributable to sales of bags, travel, accessories, and home items. Other revenues toexternal customers primarily include revenues from our apparel/footwear, stationery, freight, licensing, merchandising, and gift card breakage.Net revenues by product categories are as follows (in thousands): Fiscal Year Ended February 3, 2018 January 28, 2017 January 30, 2016Net revenues: Bags $184,773 $207,765 $215,835Travel 118,655 119,082 125,279Accessories 100,246 106,223 112,066Home 30,819 27,574 22,729Other 20,155 25,293 26,689Total $454,648 $485,937 $502,598As of February 3, 2018 and January 28, 2017, substantially all of the Company’s long-lived assets were located in the United States. 77Table of ContentsVera Bradley, Inc.Notes to Consolidated Financial Statements16.Quarterly Financial Information (Unaudited)The table below sets forth selected quarterly financial data for each of the last two fiscal years (in thousands, except per share data). The fourth quarter offiscal 2018 was fourteen weeks in duration. Each of the other quarters presented was thirteen weeks in duration. Fiscal Year Ended February 3, 2018 FirstQuarter (1) SecondQuarter (2) ThirdQuarter (3) FourthQuarter (4)(5)(6) (unaudited) (unaudited) (unaudited) (unaudited)Net revenues $96,135 $112,418 $114,095 $132,000Gross profit 52,700 63,293 63,829 74,187Operating (loss) income (4,804) 3,709 462 15,614Net (loss) income (4,049) 2,193 359 8,513Basic net (loss) income per share (0.11) 0.06 0.01 0.24Diluted net (loss) income per share (0.11) 0.06 0.01 0.24(1)Includes $1.3 million ($0.8 million after the associated tax benefit) for severance charges. Refer to Note 13 herein for additional information.(2)Includes charges of $2.3 million for strategic consulting related to Vision 20/20, $1.2 million for severance, and $0.3 million for lease termination($2.4 million collectively after the associated tax benefit). Refer to Note 13 herein for additional information.(3)Includes Vision 20/20-related charges of $5.9 million for store impairment, $2.9 million for severance, $2.3 million for strategic consulting, $0.9million for inventory adjustments, and $0.6 million for other Vision 20/20. Collectively, after the associated tax benefit, the charges were $7.9million. Refer to Note 3 and Note 13 herein for additional information.(4)Includes Vision 20/20-related charges of $1.2 million for severance, $0.4 million for store impairment, and $0.2 million for other Vision 20/20 ($1.2million collectively after the associated tax benefit). Refer to Note 3 and Note 13 herein for additional information.(5)Includes a $2.1 million net tax charge related to the enactment of the Tax Act. Refer to Note 5 herein for additional information.(6)Includes an extra week which contributed approximately $4.1 million in net revenues and added an estimated $0.01 to diluted net income per share. Fiscal Year Ended January 28, 2017 FirstQuarter SecondQuarter (1) ThirdQuarter (2)(3) FourthQuarter (4) (unaudited) (unaudited) (unaudited) (unaudited)Net revenues $105,181 $119,245 $126,662 $134,849Gross profit 59,656 68,388 72,913 75,089Operating income 3,857 8,303 11,402 4,658Net income 2,418 5,109 8,780 3,451Basic net income per share 0.06 0.14 0.24 0.10Diluted net income per share 0.06 0.14 0.24 0.09(1)Includes charges of $1.6 million for store impairment and $0.9 million for severance ($1.6 million collectively after the associated tax benefit). Referto Note 3 herein for additional information regarding store impairments.(2)Includes $0.6 million for store impairment charges ($0.4 million after the associated tax benefit). Refer to Note 3 herein for additional information.(3)Includes a $1.6 million income tax benefit for the release of certain income tax reserves.(4)Includes $10.5 million for store impairment charges ($6.6 million after the associated tax benefit). Refer to Note 3 herein for additional information.Information in any one Quarterly period should not be considered indicative of annual results due to the effect of seasonality of the business.78Table of ContentsItem 9. Changes in and Disagreements With Accountants on Accounting and Financial DisclosureNone. Item 9A. Controls and ProceduresDisclosure Controls and ProceduresBased on the evaluation of the Company’s disclosure controls and procedures, as that term is defined in Rule 13a-15(e) under the Securities Exchange Act of1934, as amended (the “Exchange Act”), each of Robert Wallstrom, the Chief Executive Officer of the Company, and John Enwright, the Chief FinancialOfficer of the Company, has concluded that the Company’s disclosure controls and procedures are effective as of February 3, 2018.Management’s Report on Internal Control over Financial ReportingThe Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in rules 13a-15(f)and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accountingprinciples. Management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, hasevaluated the effectiveness of the Company’s internal control over financial reporting using the criteria set forth by the Committee of SponsoringOrganizations (COSO) of the Treadway Commission (2013 framework) in Internal Control-Integrated Framework. Based on the results of that evaluation,management has concluded that such internal control over financial reporting was effective as of February 3, 2018.The effectiveness of the Company’s internal control over financial reporting as of February 3, 2018, has been audited by Deloitte and Touche LLP, anindependent registered public accounting firm, as stated in their report which appears in Item 8. of this Annual Report on Form 10-K.Changes in Internal Control over Financial ReportingThere were no changes in internal control over financial reporting that occurred during the fourth fiscal quarter that have materially affected, or arereasonably likely to materially affect, the Company’s internal control over financial reporting. Item 9B. Other InformationNone.79Table of ContentsPART III Item 10. Directors, Executive Officers and Corporate GovernanceThe information set forth in the Proxy Statement for the 2018 Annual Meeting of Shareholders under the headings “Board of Directors Information,” “FamilyRelationships,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Corporate Governance Guidelines, Committee Charters and Code of Ethics,”and “Committees – Audit Committee” is incorporated herein by reference. The Proxy Statement will be filed with the Commission within 120 days after theend of the fiscal year covered by this Form 10-K pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. In addition, theinformation set forth under the heading “Item 1: Business – Executive Officers of the Company” in this Form 10-K is incorporated herein by reference. Item 11. Executive CompensationThe information set forth in the Proxy Statement for the 2018 Annual Meeting of Shareholders under the headings “Executive Compensation Discussion andAnalysis,” “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report” is incorporated herein by reference. TheProxy Statement will be filed with the Commission within 120 days after the end of the fiscal year covered by this Form 10-K pursuant to Regulation 14Aunder the Securities Exchange Act of 1934, as amended. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information set forth in the Proxy Statement for the 2018 Annual Meeting of Shareholders under the heading “Share Ownership by Certain BeneficialOwners and Management” is incorporated herein by reference. The Proxy Statement will be filed with the Commission within 120 days after the end of thefiscal year covered by this Form 10-K pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.Securities Authorized for Issuance Under Equity Compensation PlansThe following table sets forth information regarding equity securities authorized for issuance under our equity compensation plans as of February 3, 2018:Plan Category Number ofSecurities to BeIssued uponExercise ofOutstandingOptions, Warrantsand Rights (a) (2) Weighted-AverageExercise Price ofOutstandingOptions, Warrantsand Rights (b) ($) Number of SecuritiesRemaining Available forFuture Issuance Underthe EquityCompensation Plans(Excluding SecuritiesReflected in Column(a)) (c)Equity compensation plans approved by security holders (1) 1,288,500 — 4,787,501Equity compensation plans not approved by security holders — — —Total 1,288,500 — 4,787,501(1)Approved before our initial public offering.(2)Assumes that target performance requirements will be achieved for performance shares with incomplete performance periods.80Table of ContentsItem 13. Certain Relationships and Related Transactions, and Director IndependenceThe information set forth in the Proxy Statement for the 2018 Annual Meeting of Shareholders under the headings “Certain Relationships and Related PartyTransactions” and “Board Independence” is incorporated herein by reference. The Proxy Statement will be filed with the Commission within 120 days afterthe end of the fiscal year covered by this Form 10-K pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. Item 14. Principal Accounting Fees and ServicesThe information required by this item is incorporated herein by reference to our 2018 Proxy Statement under the caption “Principal Accounting Fees andServices.” The Proxy Statement will be filed with the Commission within 120 days after the end of the fiscal year covered by this Form 10-K pursuant toRegulation 14A under the Securities Exchange Act of 1934, as amended.81Table of ContentsPART IV Item 15. Exhibits, Financial Statement Schedules(1) Consolidated Financial StatementsThe following consolidated financial statements of Vera Bradley, Inc. are filed as part of this report under Item 8. Financial Statements and SupplementaryData: Reports of Independent Registered Public Accounting Firms52Consolidated Balance Sheets as of February 3, 2018, and January 28, 201755Consolidated Statements of Income for the fiscal years ended February 3, 2018, January 28, 2017, and January 30, 201656Consolidated Statements of Comprehensive Income for the fiscal years ended February 3, 2018, January 28, 2017, and January 30, 201657Consolidated Statements of Shareholders’ Equity for the fiscal years ended February 3, 2018, January 28, 2017, and January 30, 201658Consolidated Statements of Cash Flows for the fiscal years ended February 3, 2018, January 28, 2017, and January 30, 201659Notes to Consolidated Financial Statements60(2) Financial Statement SchedulesFinancial statement schedules have been omitted because they are not required or are not applicable or because the information required in those scheduleseither is not material or is included in the consolidated financial statements or the accompanying notes.(3) List of ExhibitsThe exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Form 10-K.Item 16. Form 10-K SummaryNot Applicable82Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to besigned on its behalf by the undersigned, thereunto duly authorized, on April 3, 2018. Vera Bradley, Inc. /s/ John Enwright John Enwright Chief Financial Officer POWER OF ATTORNEYKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints John Enwright and RobertWallstrom, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and inhis or her name, place, and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with allexhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agentsand each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith as fullyto all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them,or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Registrant andin the capacities indicated on April 3, 2018. Signature Title /s/ Robert Wallstrom Director and Chief Executive Officer (principal executive officer)Robert Wallstrom /s/ John Enwright Chief Financial Officer (principal accounting officer)John Enwright /s/ Barbara Bradley Baekgaard DirectorBarbara Bradley Baekgaard /s/ Richard Baum DirectorRichard Baum /s/ Robert J. Hall DirectorRobert J. Hall /s/ Mary Lou Kelley DirectorMary Lou Kelley /s/ John E. Kyees DirectorJohn E. Kyees 83Table of ContentsSignature Title /s/ Matthew McEvoy DirectorMatthew McEvoy /s/ P. Michael Miller DirectorP. Michael Miller /s/ Patricia R. Miller DirectorPatricia R. Miller /s/ Frances P. Philip DirectorFrances P. Philip /s/ Edward M. Schmults DirectorEdward M. Schmults 84Table of ContentsEXHIBIT INDEX Exhibit No. Description 3.1 Second Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1, Registration No. 333-167934) 3.2 Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1, Registration No. 333-167934) 4.1 Specimen Common Stock Certificate (Incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-1, Registration No.333-167934) 10.1 Vera Bradley, Inc. 2010 Equity and Incentive Plan (Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-1,Registration No. 333-167934) 10.2 Form of Indemnification Agreement (Incorporated by reference to Exhibit 10.5 to the Registration Statement on Form S-1, Registration No.333-167934) 10.3 Form of Outside Director Restricted Stock Unit Terms and Conditions (Incorporated by reference to Exhibit 10.2 to the Quarterly Report onForm 10-Q for the quarter ended May 3, 2014) 10.4 Vera Bradley, Inc. 2014 Executive Severance Plan (Incorporated by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q for thequarter ended May 3, 2014) 10.5 Fiscal 2016 Annual Incentive Compensation Plan (Executives) (Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form10-Q for the quarter ended May 2, 2015) 10.6 Second Amended and Restated Credit Agreement dated as of July 15, 2015 among Vera Bradley Designs, Inc., JPMorgan Chase Bank,National Association, and the lenders party thereto (Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for thequarter ended August 1, 2015) 10.7 Fiscal 2017 Annual Incentive Compensation Plan (Executives) (Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form10-Q for the quarter ended April 30, 2016) 10.8 Employment Agreement for Robert Wallstrom dated November 11, 2013 (Incorporated by reference to Exhibit 10.1 to the Current Reporton Form 8-K filed November 5, 2013) 10.9 Second Amendment of Employment Agreement for Robert Wallstrom dated June 17, 2016 (Incorporated by reference to Exhibit 10.1 to theCurrent Report on Form 8-K filed June 22, 2016) 10.10 Fiscal 2018 Annual Incentive Compensation Plan (Executives) (Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form10-Q for the quarter ended April 29, 2017) 10.11 Form of Performance-Based Award Agreement under the 2010 Equity and Incentive Plan (Incorporated by reference to Exhibit 10.3 to theQuarterly Report on Form 10-Q for the quarter ended April 29, 2017) 10.12* Amendment No. 1 to Second Amended and Restated Credit Agreement, dated as of February 1, 2016, among Vera Bradley Designs, Inc.,JPMorgan Chase Bank, National Association, and the lenders party thereto 10.13 Amendment No. 2 to Second Amended and Restated Credit Agreement, dated as of October 20, 2017, among Vera Bradley Designs, Inc.,JPMorgan Chase Bank, National Association, and the lenders party thereto (Incorporated by reference to Exhibit 10.1 to the Current Reporton Form 8-K filed October 26, 2017) 10.14* Form of Restricted Stock Unit/Performance Unit Terms and Conditions85Table of ContentsExhibit No. Description 21.1* Subsidiaries of Vera Bradley, Inc. 23.1* Consent of Deloitte & Touche LLP 23.2* Consent of Ernst & Young LLP 31.1* Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer 31.2* Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer 32.1* Section 1350 Certifications 101 The following materials from Vera Bradley, Inc.’s Annual Report on Form 10-K for the year ended February 3, 2018 formatted in ExtensibleBusiness Reporting Language (XBRL): (i) Consolidated Statements of Operations and Comprehensive Income for the fiscal years endedFebruary 3, 2018, January 28, 2017, and January 30, 2016; (ii) Consolidated Balance Sheets as of February 3, 2018, and January 28, 2017;(iii) Consolidated Statements of Shareholders’ Equity for the fiscal years ended February 3, 2018, January 28, 2017 and January 30, 2016;(iv) Consolidated Statements of Cash Flows for the fiscal years ended February 3, 2018, January 28, 2017, and January 30, 2016; and (v)related notes. ** * Filed herewith ** Pursuant to Rule 406T of SEC Regulation S-T, the Interactive Data Files included as Exhibit 101 hereto are deemed not filed or part of aregistration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed forpurposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these Sections.86Exhibit 10.12AMENDMENT NO. 1 TO SECOND AMENDED AND RESTATED CREDIT AGREEMENTThis Amendment No. 1 to Second Amended and Restated Credit Agreement (this “Amendment”) is entered into as of February 1, 2016 by andamong Vera Bradley Designs, Inc., an Indiana corporation (the “Borrower”), the Lenders party hereto and JPMorgan Chase Bank, N.A, individually and asadministrative agent (the “Administrative Agent”).RECITALSA. The Borrower, the Administrative Agent and the Lenders are party to that certain Second Amended and Restated Credit Agreement dated as ofJuly 15, 2015 (the “Credit Agreement”). Unless otherwise specified herein, capitalized terms used in this Amendment shall have the meanings ascribed tothem by the Credit Agreement.B. The Borrower, the Lenders party hereto and the Administrative Agent wish to amend the Credit Agreement on the terms and conditions set forthbelow.Now, therefore, in consideration of the mutual execution hereof and other good and valuable consideration, the parties hereto agree as follows:1. Amendments to Credit Agreement. Upon the First Amendment Effective Date (as defined below), the Credit Agreement shall beamended as follows:(a) Section 6.01 is amended by (i) relettering clauses (h) and (i), respectively, as clauses (i) and (j), respectively and (ii) inserting a newclause (h) between clauses (g) and (i) reading as follows:Indebtedness of Foreign Subsidiaries arising out of loans and advances permitted by Section 6.04(g);(b) Section 6.04(c) is amended and restated in its entirety to read as follows:loans, advances or investments made among the Domestic Credit Parties and guarantees by Domestic Credit Parties of obligations ofother Domestic Credit Parties (other than obligations of Holdings);(c) Section 6.04(g) is amended and restated in its entirety to read as follows:loans, advances or investments by the Borrower or any of its Subsidiaries to or in Foreign Subsidiaries in an aggregate amount (calculatedby reference to the initial amounts thereof without giving effect to subsequent appreciation or depreciation of the value of the investmentor dividends or distributions in respect thereof but giving effect to repayments of the principal amount of loans and advances) not toexceed $50,000,000 at any time outstanding;(d) Section 6.07 is amended and restated in its entirety to read as follows:Transactions with Affiliates. The Borrower will not, and will not permit any of its Subsidiaries to, sell, lease or otherwise transfer anyproperty or assets to, or purchase, lease or otherwise acquire any property or assets from, or otherwise engage in any other transactions with,any of its Affiliates, except (a) in the ordinary course of business at prices and on terms and conditions not less favorable to the Borrower orsuch Subsidiary than could be obtained on an arm’s-length basis from unrelated third parties, (b) transactions between or among the CreditParties not involving any other Affiliate, (c) any Restricted Payment permitted by Section 6.06 and (d) any loan or advance permitted bySection 6.01(h).2. Representations and Warranties of the Borrower. The Borrower represents and warrants that:(a) The execution, delivery and performance by the Borrower of this Amendment have been duly authorized by all necessary corporateaction and that this Amendment is a legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with itsterms, except as the enforcement thereof may be subject to theeffect of any applicable bankruptcy, insolvency, reorganization, moratorium or similar law affecting creditors’ rights generally or by generalprinciples of equity;(b) Each of the representations and warranties contained in the Credit Agreement and the other Credit Documents is true and correct onand as of the date hereof (except to the extent that such representation or warranty expressly refers to an earlier date, in which case it shall be true andcorrect as of such earlier date); and(c) No Default has occurred and is continuing.3. Effective Date. This Amendment shall become effective on the date (the “First Amendment Effective Date”) on which the followingconditions have been satisfied:(a) the execution and delivery hereof by the Borrower, the Required Lenders and the Administrative Agent;(b) the execution and delivery by Holdings and each of the Subsidiary Guarantors of a Reaffirmation (the “Reaffirmation”) substantiallyin the form of Exhibit A hereto;(c) the Borrower shall have paid or reimbursed, to the extent invoiced, all out of pocket expenses (including legal fees) required to bereimbursed or paid by the Borrower pursuant hereto or to the Credit Agreement; and(d) the Administrative Agent shall have received such other certificates, resolutions, documents and agreements as the AdministrativeAgent may reasonably request.4. Reference to and Effect Upon the Credit Documents.(a) Except as specifically amended above, the Credit Agreement and the other Credit Documents shall remain in full force and effect andare hereby ratified and confirmed. This Amendment shall be deemed to be a Credit Document.(b) The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of theAdministrative Agent, the Collateral Agent or any Lender under the Credit Agreement or any Credit Document, nor constitute a waiver of anyprovision of the Credit Agreement or any Credit Document, except as specifically set forth herein. Upon the effectiveness of this Amendment, eachreference in the Credit Agreement to “this Agreement”, “hereunder”, “hereof”, “herein” or words of similar import shall mean and be a reference tothe Credit Agreement as amended hereby.5. Costs and Expenses. The Borrower hereby affirms its obligation under Section 9.03 of the Credit Agreement to reimburse theAdministrative Agent for all reasonable out-of-pocket expenses incurred by the Administrative Agent in connection with the preparation, negotiation,execution and delivery of this Amendment, including but not limited to the reasonable fees, charges and disbursements of attorneys for the AdministrativeAgent with respect thereto.6. Governing Law. This Amendment shall be construed in accordance with and governed by the law of the State of New York.7. Headings. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part ofthis Amendment for any other purposes.8. Counterparts. This Amendment may be executed in any number of counterparts, each of which when so executed shall be deemed anoriginal but all such counterparts shall constitute one and the same instrument. Delivery of an executed signature page of this Amendment by facsimiletransmission or electronic mail shall be effective as delivery of a manually executed counterpart hereof.[signature page follows]IN WITNESS WHEREOF, the parties have executed this Amendment as of the date and year first above written.VERA BRADLEY DESIGNS, INC. By/s/ Sheryl Miller Name:Sheryl Miller Title:VP, Corporate ControllerJPMORGAN CHASE BANK, N.A., as Administrative Agent and a Lender By/s/ Morgan K. Boudler Name:Morgan K. Boudler Title:Executive Director[Signature Page to Amendment No. 1 to Second Amended and Restated Credit Agreement]WELLS FARGO BANK, N.A., as a Lender By/s/ John E. Burda Name:John E. Burda Title:Senior Vice President[Signature Page to Amendment No. 1 to Second Amended and Restated Credit Agreement]PNC BANK, NATIONAL ASSOCIATION, as a Lender By/s/ Corinna Ladd Name:Corinna Ladd Title:Senior Vice President[Signature Page to Amendment No. 1 to Second Amended and Restated Credit Agreement]KeyBank National Association, as a Lender By/s/ Marianne T. Meil Name:Marianne T. Meil Title:KeyBank National Association[Signature Page to Amendment No. 1 to Second Amended and Restated Credit Agreement]EXHIBIT AREAFFIRMATIONEach of the undersigned (i) acknowledges receipt of a copy of Amendment No. 1 to Second Amended and Restated Credit Agreement (the“Amendment”), amending the Second Amended and Restated Credit Agreement dated as of July 15, 2015 (the “Credit Agreement”), (ii) consents to theAmendment and each of the transactions referenced therein, and (iii) hereby reaffirms its obligations, as applicable, under the Subsidiary Guaranty dated as ofJuly 15, 2015 and the Parent Guaranty dated as of July 15, 2015, each, in favor of JPMorgan Chase Bank, N.A., as Administrative Agent. Capitalized termsused herein shall have the meanings ascribed to them by the Credit Agreement.Dated as of February 1, 2016VERA BRADLEY, INC. By:/s/ Sheryl Miller Title:VP, Corporate ControllerVERA BRADLEY SALES, LLC By:/s/ Sheryl Miller Title:VP, Corporate ControllerVERA BRADLEY INTERNATIONAL, LLC By:/s/ Sheryl Miller Title:VP, Corporate ControllerExhibit 10.14Vera Bradley, Inc.2010 Equity and Incentive PlanLONG TERM INCENTIVE PLANRESTRICTED STOCK UNIT/PERFORMANCE UNITTERMS AND CONDITIONS1.Definitions. Any term capitalized herein but not defined will have the meaning set forth in the Vera Bradley, Inc. 2010 Equity andIncentive Plan (the "Plan").2.Grant and Vesting of Restricted Stock Units.(a)As of the grant date specified in the Award Agreement (the "Grant Date"), the Participant will be credited with the number of RestrictedStock Units set forth in the Award Agreement. Each Restricted Stock Unit is a notional amount that represents one unvested share of Common Stock. EachRestricted Stock Unit constitutes the right, subject to the terms and conditions of the Plan and this document, to the distribution of a Share if and when theRestricted Stock Unit vests. (b)Restricted Stock Units will vest on each of the first three anniversaries of the Grant Date. If the Participant's Service with the Companyand all of its Affiliates terminates before the date that a grant of Restricted Stock Units vests, his or her right to receive the Shares underlying such unvestedRestricted Stock Units will be only as provided in Section 5.3.Grant and Vesting of Performance Units ("Performance RSUs").(a)As of the Grant Date, the Participant will be credited with the number of Performance RSUs set forth in the Award Agreement. EachPerformance RSU is a notional amount that represents one unvested share of Common Stock. Each Performance RSU constitutes the right, subject to the termsand conditions of the Plan and this document, to the distribution of a Share if and when the Performance RSU is deemed earned and vested.(b)Performance RSUs granted under the Plan are intended to qualify as performance-based compensation under section 162(m) of theInternal Revenue Code of 1986, as amended ("Code"). Performance RSUs (or tranches of such Performance RSUs) will become earned only if the Companyachieves a stated level of "Earnings Per Share" (as defined below) during the applicable Performance Year within the Performance Period as set forth in theAward Agreement. Except as provided in Section 5, any earned Performance RSUs (and the Participant's right to receive the Shares underlying suchPerformance RSUs) will become vested only if the Participant remains continuously employed with the Company during the Performance Period. Thefollowing additional provisions apply to grants of Performance RSUs:(i)Certification of Results. Before any award of Performance RSUs is deemed earned with respect to a Performance Period, theCommittee shall certify, in accordance with Section 9.5 of the Plan, in writing (i) that the performance goals described in the Award Agreement hasbeen achieved for the Performance Period, and (ii) the calculation of "Earnings Per Share" (as defined below) for each Performance Year within thePerformance Period.(ii)Definition of "Earnings Per Share." For purposes of this Subsection 3(b), the term "Earnings Per Share" means, with respect toany Awards of Performance RSUs, the Company's consolidated earnings per share, as determined in accordance with U.S. GAAP, adjusted to excludethe effects, as shown on the financial statements furnished as part of Form 8-K (announcing the Company's fiscal year-end financial results) for anyfiscal year of the Company ending with or within the Performance Period, of (i) any acquisition during the Performance Period, including theamortization expense of intangible assets acquired during the Performance Period, (ii) material charges or income arising from litigation, (iii)corporate restructuring, asset impairment, or other special charges, and (iv) cumulative effect of changes to U.S. GAAP accounting.(iii)Definition of "Performance Year." For purposes of this Subsection 3(b), the term "Performance Year" means, with respect to anyAwards of Performance RSUs, each fiscal year of the Company ending within the Performance Period.(iv)Finality of Committee Determinations. Any determination by the Committee of Earnings per Share and the level andentitlement to the Award of Performance RSUs, and any interpretation, rule, or decision adopted by the Committee under the Plan or in carrying outor administering the Plan, is final and binding for all purposes and upon allinterested persons, their heirs, and personal representatives. The Committee may rely conclusively on determinations made by the Company and itsauditors to determine Earnings per Share and related information for purposes of administration of the Plan, whether such information is determinedby the Company, its auditors, or a third-party vendor engaged to provide such information to the Company. This Subsection is not intended to limitthe Committee's power, to the extent it deems proper in its sole discretion, to take any action permitted under the Plan and Code Section 162(m).4.Rights as a Stockholder.(a)Unless and until a Restricted Stock Unit or an earned Performance RSU, as applicable, has vested and the Share underlying it has beendistributed to the Participant, the Participant will not be entitled to vote in respect of that Restricted Stock Unit or Performance RSU (as applicable) or thatShare.(b)If the Company declares a cash dividend on its Shares, then, on the payment date of the dividend, the Participant will be credited withdividend equivalents equal to the amount of cash dividend per Share multiplied by the number of outstanding Restricted Stock Units or Performance RSUs(as applicable) credited to the Participant through the record date. The dollar amount credited to a Participant under the preceding sentence will be creditedto an account ("Account") established for the Participant for bookkeeping purposes only on the books of the Company. The amounts credited to the Accountwill be credited as of the last day of each month with interest, compounded monthly, until the amount credited to the Account is paid to the Participant. Therate of interest credited under the previous sentence will be the prime rate of interest as reported by the Midwest edition of the Wall Street Journal for thesecond business day of each fiscal quarter on an annual basis. The balance in the Account will be subject to the same terms regarding vesting and forfeiture asthe Participant's Restricted Stock Units or Performance RSUs, as applicable, awarded under the applicable Award Agreement, and will be paid in cash in asingle sum at the time that the Shares associated with the Participant's Restricted Stock Units or Performance RSUs, as applicable, are delivered (or forfeited atthe time that the Participant's Restricted Stock Units or Performance RSUs, as applicable, are forfeited). 5.Termination of Service; Change in Control. If a Participant's Service is terminated for any reason during the applicable Restricted Periodor Performance Period, the terms and conditions of the underlying Award Agreement will govern when and whether the Participant will forfeit the right toreceive Shares underlying any Restricted Stock Units or Performance RSUs, as applicable, that have not yet vested. To the extent provided in the underlyingAward Agreement, all or a portion of the previously unvested Restricted Stock Units or Performance RSUs, as applicable, then outstanding will vestimmediately prior to or upon the consummation of a Change in Control.For purposes hereof, a "Change in Control" shall mean the occurrence of any one or more of the following: (a) the acquisition of ownership, directlyor indirectly, beneficially or of record, by any Person or group (within the meaning of the Exchange Act and the rules of the Securities and ExchangeCommission as in effect on the date of this Award), other than (i) Barbara Baekgaard, Patricia Miller, Michael Ray and Kim Colby and their respective heirsand descendants and any trust established for the benefit of such Persons, (ii) the Company or a corporation owned directly or indirectly by the shareholdersof the Company in substantially the same proportions as their ownership of stock of the Company, or (iii) any employee benefit plan (or related trust)sponsored or maintained by the Company or any Affiliate, of securities of the Company representing more than twenty-five percent (25%) of the combinedvoting power of the Company's then outstanding securities; (b) the occupation of a majority of the seats (other than vacant seats) on the Board by Personswho were neither (i) nominated by the Board nor (ii) appointed by directors so nominated; or (c) the consummation of (i) an agreement for the sale ordisposition of all or substantially all of the Company's assets, or (ii) a merger, consolidation or reorganization of the Company with or involving any othercorporation, other than a merger, consolidation or reorganization that results in the voting securities of the Company outstanding immediately prior theretocontinuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) ofthe combined voting power of the voting securities of the Company (or such surviving entity) outstanding immediately after such merger, consolidation orreorganization.6.Timing and Form of Payment. Except as provided in this Section or in clauses 2(b) or 3(b) or Section 5, above, once a Restricted StockUnit vests or a Performance RSU is earned and vested, as applicable, the Participant will be entitled to receive a Share in its place. Delivery of the Share willbe made, including delivery with respect to a Disabled Participant, or to the estate of a deceased Participant, after the end of the Restricted Period orPerformance Period, as applicable, and not later than the 15th day of the third month following the end of the Restricted Period or Performance Period, asapplicable. Shares will be credited to an account established for the benefit of the Participant with the Company's administrative agent. The Participant willhave full legal and beneficial ownership with respect to the Shares at that time.7.Assignment and Transfers. The Participant may not assign, encumber or transfer any of his or her rights and interests under the Awarddescribed in this document, except, in the event of his or her death, by will or the laws of descent and distribution.8.Withholding Tax. The Company shall have the power and the right to deduct or withhold an amount sufficient to satisfy federal, state,and local taxes (including FICA obligations), domestic or foreign, and other deductions required by law to be withheld with respect to the Award. Unless theCommittee or its designee agrees to a different method for withholding such taxes, the number of Shares (underlying the Award) necessary to coverapplicable withholdings will be withheld from the issuance of any Shares of exchange for the Award.9.Securities Law Requirements.(a)The Restricted Stock Units and Performance RSUs are subject to the further requirement that, if at any time the Committee determines inits sole discretion that the listing or qualification of the Shares subject to the Restricted Stock Units and Performance RSUs under any securities exchangerequirements or under any applicable law, or the consent or approval of any governmental regulatory body, is necessary as a condition of, or in connectionwith, the issuance of Shares under it, then Shares will not be issued under the Restricted Stock Units and Performance RSUs, unless the necessary listing,qualification, consent or approval has been effected or obtained free of any conditions not acceptable to the Committee.(b)No person who acquires Shares pursuant to the Award reflected in this document may, during any period of time during which thatperson is an affiliate of the Company (within the meaning of the rules and regulations of the Securities and Exchange Commission under the Securities Act),sell the Shares, unless the offer and sale is made pursuant to (i) an effective registration statement under the Securities Act, which is current and includes theShares to be sold, or (ii) an appropriate exemption from the registration requirements of the Securities Act, such as that set forth in Rule 144 promulgatedunder the Securities Act. With respect to individuals subject to Section 16 of the Exchange Act, transactions under this Award are intended to comply with allapplicable conditions of Rule 16b-3, or its successors under the Exchange Act. To the extent any provision of the Award or action by the Committee fails toso comply, the Committee may determine, to the extent permitted by law, that the provision or action will be null and void.10.No Limitation on Rights of the Company. Subject to Sections 4.3, 14.1 and 14.2 of the Plan, the grant of the Award described in thisdocument will not in any way affect the right or power of the Company to make adjustments, reclassifications or changes in its capital or business structure,or to merge, consolidate, dissolve, liquidate, sell or transfer all or any part of its business or assets.11.Plan, Restricted Stock Units, Performance RSUs and Award Not a Contract of Employment. Neither the Plan, the Restricted Stock Units,the Performance RSUs nor any other right or interest that is part of the Award granted under the Plan or this document is a contract of employment, and noterms of employment or Service of the Participant will be affected in any way by the Plan, the Restricted Stock Units, the Performance RSUs, the Award, thisdocument or related instruments, except as specifically provided therein. Neither the establishment of the Plan nor the Award will be construed as conferringany legal rights upon the Participant for a continuation of employment or Service, nor will it interfere with the right of the Company or any Affiliate todischarge the Participant and to treat him or her without regard to the effect that treatment might have upon him or her as a Participant.12.Participant to Have No Rights as a Stockholder. Except as provided in Section 4 above, the Participant will have no rights as astockholder with respect to any Shares subject to the Restricted Stock Units or Performance RSUs, as applicable, prior to the date on which he or she isrecorded as the holder of those Shares on the records of the Company.13.Notice. Any notice or other communication required or permitted hereunder must be in writing and must be delivered personally, or sentby certified, registered or express mail, postage prepaid. Any such notice will be deemed given when so delivered personally or, if mailed, three days after thedate of deposit in the United States mail, in the case of the Company to 12420 Stonebridge Road, Roanoke, Indiana 46783, Attn: Corporate Secretary, and, inthe case of the Participant, to the last known address of the Participant in the Company's records.14.Governing Law. This document and the Award will be construed and enforced in accordance with, and governed by, the laws of the Stateof Indiana, determined without regard to its conflict of law rules.15.Code Section 409A. Notwithstanding any other provision in this document, if a Participant is a "specified employee" (as such term isdefined for purposes of Code Section 409A) at the time of his or her termination of Service, no amount that is subject to Code Section 409A and that becomespayable by reason of such termination of Service shall be paid to the Participant before the earlier of (i) the expiration of the six-month period measured fromthe date of the Participant's termination of Service, and (ii) the date of the Participant's death.16.Plan Document Controls. The rights granted under this document are in all respects subject to the provisions of the Plan to the sameextent and with the same effect as if they were set forth fully therein. If the terms of this document or the Award conflict with the terms of the Plan, the Planwill control.I/2776631.7Exhibit 21.1Vera Bradley, Inc.SubsidiariesSubsidiary State of IncorporationVera Bradley Designs, Inc IndianaVera Bradley International, LLC IndianaVera Bradley Sales, LLC IndianaVera Bradley Handbag Design (Dongguan) Co., Ltd. The People's Republic of ChinaVera Bradley Hong Kong Co., Limited Hong KongExhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in Registration Statement No. 333-170062 on Form S-8 of our reports dated April 3, 2018, relating to theconsolidated financial statements of Vera Bradley, Inc. and subsidiaries, and the effectiveness of Vera Bradley, Inc. and subsidiaries’ internal control overfinancial reporting, appearing in the Annual Report on Form 10-K of Vera Bradley, Inc. for the year ended February 3, 2018./s/ Deloitte & Touche LLPIndianapolis, IndianaApril 3, 2018Exhibit 23.2CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-170062) of Vera Bradley, Inc. of our report datedMarch 29, 2016, included in this Annual Report (Form 10-K) of Vera Bradley, Inc. for the year ended January 30, 2016./s/ Ernst & Young LLPIndianapolis, IndianaApril 3, 2018Exhibit 31.1CERTIFICATIONSI, Robert Wallstrom, certify that:1.I have reviewed this Annual Report on Form 10-K of Vera Bradley, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared;(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accounting principles;(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting.Date: April 3, 2018 /s/ Robert Wallstrom Robert Wallstrom Chief Executive OfficerExhibit 31.2CERTIFICATIONSI, John Enwright, certify that:1.I have reviewed this Annual Report on Form 10-K of Vera Bradley, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared;(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accounting principles;(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting.Date: April 3, 2018 /s/ John Enwright John Enwright Chief Financial OfficerExhibit 32.1Certifications Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002I, Robert Wallstrom, the Chief Executive Officer of Vera Bradley, Inc., certify that (i) the annual report on Form 10-K for the fiscal year endedFebruary 3, 2018 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) theinformation contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Vera Bradley, Inc. as of thedates and for the periods set forth therein. /s/ Robert Wallstrom Robert Wallstrom Chief Executive Officer April 3, 2018 DateI, John Enwright, the Chief Financial Officer of Vera Bradley, Inc., certify that (i) the annual report on Form 10-K for the fiscal year ended February 3,2018 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information containedin the Report fairly presents, in all material respects, the financial condition and results of operations of Vera Bradley, Inc. as of the dates and for the periodsset forth therein. /s/ John Enwright John Enwright Chief Financial Officer April 3, 2018 Date

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