Vera Bradley, Inc. — Q2 FY2021 Form 10-Q
Reporting period: Thirteen weeks ended August 1, 2020; year-to-date means the twenty-six weeks ended that date. Comparisons are with the periods ended August 3, 2019. Amounts are in U.S. dollars unless stated otherwise.
Business context and reporting period
Vera Bradley designs and sells handbags, travel items, accessories, and gifts through retail, e-commerce, and wholesale channels. Its three reportable segments are Vera Bradley Direct, Vera Bradley Indirect, and Pura Vida, in which the Company owns 75%. Pura Vida was acquired in July 2019, so its inclusion in the current periods but only partial inclusion in prior-year results limits comparability.
COVID-19 materially affected demand, store traffic, operations, and results. Stores were temporarily closed beginning March 19, 2020, then reopened in phases from May 5. At quarter-end, 149 Vera Bradley stores were reported; all factory stores and all but three full-line stores had reopened, with reduced hours, staffing, and capacity.
Financial results
| Metric | Q2 FY2021 | Q2 FY2020 | 26 weeks FY2021 | 26 weeks FY2020 |
|---|---|---|---|---|
| Net revenues | $131.8 million | $119.8 million | $201.1 million | $210.8 million |
| Gross profit | $79.6 million | $67.3 million | $113.8 million | $117.8 million |
| Gross margin | 60.4% | 56.2% | 56.6% | 55.9% |
| SG&A | $62.2 million | $60.7 million | $121.9 million | $115.0 million |
| Operating income (loss) | $17.5 million | $7.3 million | $(8.1) million | $3.7 million |
| Net income (loss) | $8.3 million | $5.7 million | $(7.2) million | $3.3 million |
| Net income (loss) attributable to Vera Bradley, Inc. | $7.2 million | $5.9 million | $(8.1) million | $3.4 million |
| Basic EPS attributable to common shareholders | $0.42 | $0.17 | $(0.24) | $0.10 |
Q2 revenue increased 10.0%, primarily reflecting the larger contribution from Pura Vida, while Vera Bradley Direct revenue fell 13.9% and Indirect revenue fell 11.4%. Pura Vida generated $32.8 million in Q2 revenue versus $5.4 million in the prior-year partial period. Vera Bradley e-commerce revenue rose 99.1% in Q2 and 64.9% year to date. Year-to-date revenue declined 4.6%.
Q2 gross margin improved mainly due to mask sales, product collaborations, inventory management, and controlled promotions. Q2 operating income included Pura Vida intangible amortization and $1.3 million of technology re-platforming charges. Year-to-date results included $3.8 million of store impairment charges, $4.3 million of Pura Vida intangible amortization, and technology-related professional fees and accelerated depreciation. Year-to-date SG&A rose 6.0%, while operating results moved from income to a loss amid lower sales and expense deleverage.
Q2 net income attributable to the Company was $7.2 million. Basic and diluted EPS were $0.42; the EPS numerator included a $6.8 million adjustment related to the redemption value of Pura Vida’s noncontrolling interest. This adjustment is not included in reported net income attributable to Vera Bradley. Year-to-date diluted shares exclude potentially dilutive awards because they were anti-dilutive during the net loss period.
Cash flow, liquidity, and debt
- At August 1, 2020, cash and cash equivalents were $75.6 million; short- and long-term investments totaled $1.5 million, for combined cash and investments of $77.1 million.
- For the first 26 weeks, operating cash flow was negative $0.1 million, versus positive $1.1 million in the prior-year period. Investing activities provided $18.9 million; financing activities provided $6.8 million. Ending cash was $75.6 million, up from $49.9 million at fiscal year-end.
- Inventory was $136.2 million, up from $123.6 million at February 1, 2020. Accounts receivable was $28.3 million.
- The Company had $30.0 million outstanding under its $75.0 million asset-based revolving credit facility and $45.0 million available. It had borrowed $60.0 million during the first quarter and repaid $30.0 million in Q2. The Company reported covenant compliance at quarter-end.
- Capital expenditures were $4.3 million year to date. Fiscal 2021 capital expenditures were expected to be approximately $8 million to $10 million.
Outlook, management commentary, and risks
Management said it could not predict the pandemic’s full effect on future liquidity, operating results, or financial condition, and warned that effects could be significant. It stated that available cash, investments, operating cash flows, and remaining credit availability were expected to cover foreseeable working-capital needs, capital expenditures, strategic uses, and debt payments, while acknowledging uncertainty about cash needs during the pandemic. No revenue or earnings guidance was provided in the filing.
Management reported that 133 stores open for all of fiscal July generated aggregate revenue of approximately 70% of the prior year’s sales. Traffic was generally lower, while conversion and units per transaction were higher. Q2 Vera Bradley e-commerce growth and face-mask sales provided offsets to store weakness.
Actions to preserve liquidity included furloughs, temporary compensation reductions, expense cuts, inventory and purchase-order management, landlord negotiations, extended vendor terms, and suspension of share repurchases. Most furloughed associates had returned by quarter-end; approximately 10% remained furloughed as of the end of August. Store closures, reduced consumer demand, supply-chain constraints, shipping delays and costs, and possible further impairments remain risks. The Company reported $3.8 million of year-to-date store impairments and cautioned that additional impairment charges could be material.
Two lawsuits were in discovery: a Vesi licensing-related suit seeking at least $10 million in damages, and a California employee class/PAGA action. The Company denied liability in both and said it could not estimate a possible loss or range. The filing also notes the put/call rights concerning Pura Vida’s remaining 25% interest, generally exercisable beginning five years after the acquisition, subject to the agreement’s terms.
Most important facts for investors to verify
- Whether revenue and store performance recover as locations reopen, and whether e-commerce growth can offset weaker physical and wholesale channels.
- How much of reported growth and improved Q2 profitability reflects Pura Vida’s inclusion, mix, temporary cost reductions, masks, or other non-recurring factors.
- Liquidity and borrowing-base availability, covenant headroom, and the ability to generate operating cash flow while inventory and other working-capital needs remain elevated.
- Potential additional store, goodwill, or intangible-asset impairments if pandemic-related conditions deteriorate.
- Developments in the Vesi and California employment cases, for which potential losses were not estimable, and future obligations under the Pura Vida put/call arrangement.