The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity, and cash flows of our Company as of and for the thirteen and thirty-nine weeks ended October 27, 2012, and October 29, 2011. The following discussion should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended January 28, 2012, and our unaudited consolidated financial statements and the related notes included in Item 1 of this Quarterly Report.

Overview

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

We generate revenues by selling products through two reportable segments: Direct and Indirect. As of October 27, 2012, our Direct business consisted of sales of Vera Bradley products through our full-price and outlet stores in the United States; pop-up stores and permanent shop-in-shops in Japan; our websites, verabradley.com and verabradley.co.jp; and our annual outlet sale in Fort Wayne, Indiana. In the United States we operated 64 full-price and 11 outlet stores as of October 27, 2012, compared to 47 full-price stores and eight outlet stores as of October 29, 2011. As of October 27, 2012, our Indirect business consisted of sales of Vera Bradley products to approximately 3,300 specialty retailers, substantially all of which are located in the United States, and to department stores and independent e-commerce retailers.

How We Assess the Performance of Our Business

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

Net Revenues

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

Comparable-Store Sales

Comparable-store sales are calculated based upon our stores that have been open at least 12 full fiscal months as of the end of the reporting period. Remodeled stores are included in comparable-store sales unless the store was closed for a portion of the current or comparable prior period or the remodel resulted in a significant change in square footage. Some of our competitors and other retailers calculate comparable or "same store" sales differently than we do. As a result, data in this report regarding our comparable-store sales may not be comparable to similar data made available by other companies. Non-comparable store sales include sales from stores not included in comparable-store sales.

Measuring the change in year-over-year comparable-store sales allows us to evaluate how our store base is performing. Various factors affect our comparable-store sales, including:

• Overall economic trends;

• Consumer preferences and fashion trends;

• Competition;

• The timing of our releases of new patterns and collections;

• Changes in our product mix;

• Pricing;

• Store traffic;

• The level of customer service that we provide in stores;

• Our ability to source and distribute products efficiently;

• The number of stores we open and close in any period; and

• The timing and success of promotional and advertising efforts.

Gross Profit

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

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

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

SG&A expenses include selling; advertising, marketing, merchandising, and product development; and administrative. Selling expenses include Direct business expenses such as store expenses, employee compensation, and store occupancy and supply costs, as well as Indirect business expenses consisting primarily of employee compensation and other expenses associated with sales to Indirect retailers. Advertising, marketing, merchandising, and product development expenses include employee compensation, media costs, creative production expenses, marketing agency fees, new product design costs, public relations expenses, and market research expenses. A portion of our advertising expenses may be reimbursed by Indirect retailers, and such amount is classified as other income. Administrative expenses include compensation costs for corporate functions, corporate headquarters occupancy costs, consulting and software expenses, and charitable donations. SG&A expenses increase as the number of stores increase.

Other Income

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

Operating Income

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

Income Taxes

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

Results of Operations

The following tables summarize key components of our consolidated results of
operations for the periods indicated, both in dollars and as a percentage of our
net revenues (dollars in thousands):



                                            Thirteen Weeks Ended                      Thirty-nine Weeks Ended
                                      October 27,           October 29,          October 27,           October 29,
                                          2012                 2011                 2012                  2011
                                      (unaudited)           (unaudited)          (unaudited)           (unaudited)
Statement of Income Data:
Net revenues                         $      138,346        $     121,149        $     378,584         $     326,328
Cost of sales                                58,118               55,471              164,442               144,578

Gross profit                                 80,228               65,678              214,142               181,750
Selling, general, and
administrative expenses                      53,598               45,365              148,622               124,474
Other income                                    941                1,206                4,660                 6,229

Operating income                             27,571               21,519               70,180                63,505
Interest expense, net                           172                  288                  515                   933

Income before income taxes                   27,399               21,231               69,665                62,572
Income tax expense                            9,657                8,269               25,924                24,753

Net income                           $       17,742        $      12,962        $      43,741         $      37,819

Percentage of Net Revenues:
Net revenues                                  100.0 %              100.0 %              100.0 %               100.0 %
Cost of sales                                  42.0 %               45.8 %               43.4 %                44.3 %

Gross profit                                   58.0 %               54.2 %               56.6 %                55.7 %
Selling, general, and
administrative expenses                        38.7 %               37.5 %               39.3 %                38.1 %
Other income                                    0.7 %                1.0 %                1.2 %                 1.9 %

Operating income                               19.9 %               17.8 %               18.5 %                19.5 %
Interest expense, net                           0.1 %                0.2 %                0.1 %                 0.3 %

Income before income taxes                     19.8 %               17.5 %               18.4 %                19.2 %
Income tax expense                              7.0 %                6.8 %                6.8 %                 7.6 %

Net income                                     12.8 %               10.7 %               11.6 %                11.6 %

The following tables present net revenues and operating income by operating segment, both in dollars and as a percentage of our net revenues, and store data for the periods indicated (in thousands, except as otherwise indicated):

                                             Thirteen Weeks Ended                     Thirty-Nine Weeks Ended
                                       October 27,           October 29,          October 27,         October 29,
                                           2012                 2011                 2012                2011
                                       (unaudited)           (unaudited)          (unaudited)         (unaudited)
Net Revenues by Segment:
Direct                                $       64,318        $      52,026        $     189,234       $     144,038
Indirect                                      74,028               69,123              189,350             182,290

Total                                 $      138,346        $     121,149        $     378,584       $     326,328


                                             Thirteen Weeks Ended                     Thirty-Nine Weeks Ended
                                       October 27,           October 29,          October 27,         October 29,
                                           2012                 2011                 2012                2011
                                       (unaudited)           (unaudited)          (unaudited)         (unaudited)
Percentage of Net Revenue by
Segment:
Direct                                          46.5 %               42.9 %               50.0 %              44.1 %
Indirect                                        53.5 %               57.1 %               50.0 %              55.9 %

Total                                          100.0 %              100.0 %              100.0 %             100.0 %


                                             Thirteen Weeks Ended                     Thirty-Nine Weeks Ended
                                       October 29,           October 27,          October 29,         October 27,
                                           2011                 2012                 2011                2012
                                       (unaudited)           (unaudited)          (unaudited)         (unaudited)
Operating Income by Segment:
Direct                                $       17,745        $      13,490        $      49,376       $      38,895
Indirect                                      30,301               26,690               76,403              72,478

Total                                 $       48,046        $      40,180        $     125,779       $     111,373

Less:
Corporate unallocated                        (20,475 )            (18,661 )            (55,599 )           (47,868 )

Total                                 $       27,571        $      21,519        $      70,180       $      63,505


                                             Thirteen Weeks Ended                     Thirty-Nine Weeks Ended
                                       October 27,           October 29,          October 27,         October 29,
                                           2012                 2011                 2012                2011
                                       (unaudited)           (unaudited)          (unaudited)         (unaudited)
Operating Income as a Percentage
of Net Revenues by Segment:
Direct                                          27.6 %               25.9 %               26.1 %              27.0 %
Indirect                                        40.9 %               38.6 %               40.4 %              39.8 %

Store Data: (1)
Total stores open at end of
period                                            75                   55                   75                  55
Comparable-store sales increase
(2)                                              7.1 %                7.4 %                5.7 %              12.0 %
Total gross square footage at end
of period                                    153,515              111,235              153,515             111,235
Average net revenues per gross
square foot (3)                       $          248        $         233        $         750       $         703

(1) Includes only our full-price and outlet stores. Our first full-price store opened in mid-September 2007 and our first outlet store opened in November 2009.

(2) Comparable-store sales represent the net revenues of our stores that have been open at least 12 full fiscal months as of the end of the period. Increase or decrease is reported as a percentage of the comparable-store sales for the same period in the prior fiscal year. Remodeled stores are included in comparable-store sales unless the store was closed for a portion of the current or comparable prior period or the remodel resulted in a significant change in square footage.

(3) Dollars not in thousands. Average net revenues per gross square foot are calculated by dividing total net revenues for our stores that have been open at least 12 full fiscal months as of the end of the period by total gross square footage for those stores. Remodeled stores are included in average net revenues per gross square foot unless the store was closed for a portion of the period.

Thirteen Weeks Ended October 27, 2012, Compared to Thirteen Weeks Ended October 29, 2011

Net Revenues

For the thirteen weeks ended October 27, 2012, net revenues increased $17.2 million, or 14.2%, to $138.3 million, from $121.1 million in the comparable prior-year period.

Direct. For the thirteen weeks ended October 27, 2012, net revenues in the Direct segment increased $12.3 million, or 23.6%, to $64.3 million, from $52.0 million in the comparable prior-year period. This growth resulted primarily from a $10.6 million increase in revenues related to additional full-price and outlet stores, including a comparable-store sales increase of $1.6 million, or 7.1%, primarily driven by the improved performance of current product assortment and the expansion of traffic-driving events related to the timing of our seasonal releases, and a $0.3 million increase in e-commerce revenues. The aggregate number of our full-price and outlet stores grew from 55 at October 29, 2011, to 75 at October 27, 2012.

Indirect. For the thirteen weeks ended October 27, 2012, net revenues in the Indirect segment increased $4.9 million, or 7.1%, to $74.0 million, from $69.1 million in the comparable prior-year period, driven by the improved performance of current product assortment and growth in the number of department store locations.

Gross Profit

For the thirteen weeks ended October 27, 2012, gross profit increased $14.5 million, or 22.2%, to $80.2 million, from $65.7 million in the comparable prior-year period. As a percentage of net revenues, gross profit increased to 58.0% for the thirteen weeks ended October 27, 2012, from 54.2% in the comparable prior-year period. The increase as a percentage of net revenues was due to operational efficiencies primarily from less freight expense, prior year opportunistic sale of retired inventory, and lower cost of cotton, partially offset by a $1.2 million charge, related to damaged inventory written off during the quarter.

Selling, General and Administrative Expenses

For the thirteen weeks ended October 27, 2012, SG&A expenses increased $8.2 million, or 18.1%, to $53.6 million, from $45.4 million in the comparable prior-year period. As a percentage of net revenues, SG&A expenses were 38.7% and 37.4% for the thirteen weeks ended October 27, 2012, and October 29, 2011, respectively. The increase in SG&A expenses as a percentage of net revenues was due primarily to annualizing fiscal 2012 infrastructure investments made in the second half of last year and increased marketing expenses, some of which were incurred to support the future launch of the baby product line.

Other Income

For the thirteen weeks ended October 27, 2012, other income decreased $0.3 million, or 22.0%, to $0.9 million, from $1.2 million in the comparable prior-year period. The decrease in other income was in line with a decrease in associated advertising costs related to mailers for our specialty retailers.

Operating Income

For the thirteen weeks ended October 27, 2012, operating income increased $6.1 million, or 28.1%, to $27.6 million, from $21.5 million in the comparable prior-year period. As a percentage of net revenues, operating income was 19.9% and 17.8% for the thirteen weeks ended October 27, 2012, and October 29, 2011, respectively.

Direct. For the thirteen weeks ended October 27, 2012, operating income in the Direct segment increased $4.3 million, or 31.5%. As a percentage of Direct segment net revenues, operating income in the Direct segment was 27.6% and 25.9% for the thirteen weeks ended October 27, 2012, and October 29, 2011, respectively. This increase as a percentage of net revenues in the Direct segment was due primarily to improved gross margin, as a result of freight savings within our e-commerce channel.

Indirect. For the thirteen weeks ended October 27, 2012, operating income in the Indirect segment increased $3.6 million, or 13.5%. As a percentage of Indirect segment net revenues, operating income in the Indirect segment was 40.9% and 38.6% for the thirteen weeks ended October 27, 2012, and October 29, 2011, respectively. This increase as a percentage of net revenues in the Indirect segment resulted from both sales-driven leverage of SG&A and improved gross margin.

Corporate Unallocated. For the thirteen weeks ended October 27, 2012, unallocated expenses increased $1.8 million, or 9.7%, primarily as a result of higher corporate personnel costs.

Interest Expense, Net

For the thirteen weeks ended October 27, 2012, net interest expense decreased $0.1 million, or 40.3%, to $0.2 million, from $0.3 million in the comparable prior-year period. The decrease was due primarily to lower average borrowing levels in the thirteen weeks ended October 27, 2012.

Income Tax Expense

The effective tax rate for the thirteen weeks ended October 27, 2012 was 35.2%, compared to 38.9% for the thirteen weeks ended October 29, 2011. The effective tax rate reduction was primarily related to state income tax credits received and discrete items recorded during the thirteen week period. The impact of these items to the effective tax rate was approximately 4% for the quarter.

Thirty-nine Weeks Ended October 27, 2012, Compared to Thirty-nine Weeks Ended October 29, 2011

Net Revenues

For the thirty-nine weeks ended October 27, 2012, net revenues increased $52.3 million, or 16.0%, to $378.6 million, from $326.3 million in the comparable prior-year period.

Direct. For the thirty-nine weeks ended October 27, 2012, net revenues in the Direct segment increased $45.2 million, or 31.4%, to $189.2 million, from $144.0 million in the comparable prior-year period. This growth resulted primarily from a $32.9 million increase in revenues related to full-price and outlet stores, including a comparable-store sales increase of $3.6 million, or 5.7%, a $9.6 million increase in e-commerce revenues due primarily to greater traffic resulting from marketing initiatives, and an increase of $0.1 million in outlet-sale revenues. The aggregate number of our full-price and outlet stores grew from 55 at October 29, 2011 to 75 at October 27, 2012.

Indirect. For the thirty-nine weeks ended October 27, 2012, net revenues in the Indirect segment increased $7.1 million, or 3.9%, to $189.4 million, from $182.3 million in the comparable prior-year period, due primarily to the timing change of pattern releases.

Gross Profit

For the thirty-nine weeks ended October 27, 2012, gross profit increased $32.3 million, or 17.8%, to $214.1 million, from $181.8 million in the comparable prior-year period. As a percentage of net revenues, gross profit increased to 56.6% for the thirty-nine weeks ended October 27, 2012, from 55.7% in the comparable prior-year period. The increase as a percentage of net revenues was due to operational efficiencies primarily from less freight expense, and positive channel mix, partially offset by increased promotional activity.

Selling, General, and Administrative Expenses

For the thirty-nine weeks ended October 27, 2012, SG&A expenses increased $24.2 million, or 19.4%, to $148.6 million, from $124.4 million in the comparable prior-year period. As a percentage of net revenues, SG&A expenses were 39.3% and 38.1% for the thirty-nine weeks ended October 27, 2012, and October 29, 2011, respectively. The increase in SG&A expenses as a percentage of net revenues was due primarily to annualizing fiscal 2012 infrastructure investments made in the second half of last year and marketing expenses.

Other Income

For the thirty-nine weeks ended October 27, 2012, other income decreased $1.5 million, or 25.2%, to $4.7 million, from $6.2 million in the comparable prior-year period. The decrease in other income was in line with a decrease in associated advertising costs related to mailers for our specialty retailers.

Operating Income

For the thirty-nine weeks ended October 27, 2012, operating income increased $6.7 million, or 10.5%, to $70.2 million, from $63.5 million in the comparable prior-year period. As a percentage of net revenues, operating income was 18.5% and 19.5% for the thirty-nine weeks ended October 27, 2012, and October 29, 2011, respectively.

Direct. For the thirty-nine weeks ended October 27, 2012, operating income in the Direct segment increased $10.5 million, or 26.9%. As a percentage of Direct segment net revenues, operating income in the Direct segment was 26.1% and 27.0% for the thirty-nine weeks ended October 27, 2012, and October 29, 2011, respectively. This decrease as a percentage of net revenues in the Direct segment was due primarily to increased promotional activity, offset in part by a positive channel mix and operational efficiencies.

Indirect. For the thirty-nine weeks ended October 27, 2012, operating income in the Indirect segment increased $3.9 million, or 5.4%. As a percentage of Indirect segment net revenues, operating income in the Indirect segment was 40.4% and 39.8% for the thirty-nine weeks ended October 27, 2012, and October 29, 2011, respectively. This increase as a percentage of net revenues in the Indirect segment resulted primarily from sales-driven leverage of SG&A.

Corporate Unallocated. For the thirty-nine weeks ended October 27, 2012, unallocated expenses increased $7.7 million, or 16.2%, primarily as a result of higher corporate personnel and marketing costs.

Interest Expense, Net

For the thirty-nine weeks ended October 27, 2012, net interest expense decreased $0.4 million, or 44.8%, to $0.5 million, from $0.9 million in the comparable prior-year period. The decrease was due to lower average borrowing levels in the thirty-nine weeks ended October 27, 2012.

Income Tax Expense

The effective tax rate for the thirty-nine weeks ended October 27, 2012 was 37.2%, compared to 39.6% for the thirty-nine weeks ended October 29, 2011. The effective tax rate reduction was primarily related to state income tax incentive received and discrete items recorded during the thirty-nine week period. The impact of these projects on the effective tax rate was approximately 1.5% for the thirty-nine weeks ended October 27, 2012.

Liquidity and Capital Resources

General

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

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

Cash Flow Analysis

A summary of operating, investing, and financing activities is shown in the
following table (in thousands):



                                                                Thirty-nine Weeks Ended
                                                          October 27,             October 29,
                                                              2012                   2011
. . .